I gave a talk last night to the Silicon Valley Product Management Association. It’s a San Francisco Bay Area forum for networking, jobs and education for over 500Product Management professionals. This is one of the Silicon Valley organizations that remind you why this is a company-town whose main industry is entrepreneurship, (and a great example of an industry cluster.)
The published title of the talk was, “How to Create a $100M Business and Out Innovate your Competition.” I read that and thought, “If I knew how to do that I would have been a VC.” So instead I gave a talk I called, “Why Product Managers Need Sneakers.”
The gist of the talk was to observe that:
startups are not smaller versions of large companies
startups search for a business model, large companies execute an existing one
the skills that talented product managers bring to a large company are at best not transferable to a startup (and at worst destructive)
product managers in a startup can either be an asset or an albatross.
They’re an albatross if they perform as they do in a large company, and believe that they “own” customer interaction, feedback to engineering and authoring market requirements documents.
They’re an asset to a startup if they understand that their job is to get the founder outside the building and in front of customers.
They can be the scorekeepers in Customer Discovery and Validation as the company iterates and pivots the business model and refines the minimum feature set.
“Why Product Managers Wear Sneakers” was a reference to the amount of running around outside the building (with the founder) product managers will need to do in a startup. Except they won’t be called Product Managers. In a startup they will be part of the Customer Development team.
If you’ve seen my talks before you can skip forward to slide 19.
My two daughters are now in college and have put their toes in the working-world with summer jobs. As they’ve grown older, they’ve heard their parent’s advice about women in the workforce.
This post is not advice nor is it a recommendation of what you should do. It’s simply my interpretation of what I observed watching my daughters grow up. Our circumstances were unique, times have changed, and your conclusions and opinions will most certainly differ.
Gender Differences Growing up in the 60’s and 70’s when women were struggling against inequality in jobs, pay, etc., my wife and I came into parenthood with an unconscious bias that gender differences were mostly cultural. So how we raised our kids was an unintended science experiment.
When our two girls were toddlers, my wife started dressing them in overalls, and consciously bought them trucks and “boy toys” to play with along with dolls. We were both surprised and bemused to see them ignore the trucks and cars and prefer to play house. A bit later, our biggest eye-opener was when our younger daughter started asking for the “pretty pink dresses” instead of the overalls. (Given they didn’t watch TV, we ruled that out as a major role in their choices.) We started to believe that perhaps there was some hard-wiring about gender.
Boys With Sticks As our kids reached grade school, the next lesson was watching them at play. I remember hiking with my girls and two 8-year old boys. When we stopped for lunch, the boys found sticks and immediately began a sword fight. When they tired of that, the boys chased each other and wrestled until they were exhausted. The girls, finding their pile of sticks, began building something together and telling each other stories. The suggestion of “why don’t you guys try each others games?” was met with utter 8-year old disdain. I realized I was looking at something – competition versus collaboration – that also seemed hard-wired. (Competition versus collaboration is my shorthand for a much longer set of gender-linked behaviors.)
Boys Rules, Girls Lose When I entered the business world, I quickly found that office politics was just an older version of boys with sticks. The testosterone level was higher, and the game was more like musical-chairs with winners and losers until there was a single person on top. As a guy I didn’t need a rulebook to understand the game; there was a hierarchy, it was competitive, I win you lose.
It took me awhile but I realized that implicitly that advancement in corporations was unconsciously constructed around how men interact with each other. And unless they consciously work at it, most companies are not set up for collaboration.
As I grew older I realized that women in the workplace around me were having a harder time than the guys. They’d all come from college equally ambitious, but only after a few years, something different was happening to their careers.
Over time, I observed women who succeeded in the business world (as defined by their interest in moving up the hierarchy) headed in one of four career directions:
They chose departments within corporations where collaboration was an asset like Public Relations, HR, customer service, etc.
They set up their own companies to provide services and ran their own companies collaboratively.
They opted out of the workplace and raised a family, returning later.
They figured out the “boys rules” and followed them (having to work harder and smarter to prove that they were.)
Understand There Are Rules – And They’re Not Yours When my girls started to play soccer, I used to remind them, “Make sure the people on the field aren’t carrying sticks because if they’re playing field hockey while you’re playing soccer, you’re going to get hurt.” As they got older, they understood I wasn’t only talking about sports but that I was trying to teach them how to figure out the rules of any game they were about to play. And that included the workplace.
My advice to our daughters about women in the workplace has been pretty simple:
The language of business is about winners and losers. Bosses who read Sun Tzu’s “The Art of War” as a guide to business strategy or “Leadership Secrets of Attila the Hun” are unlikely to create a culture of collaboration.
There are implicit rules of competition and collaboration in companies. It’s not that anyone is hiding a secret rulebook; it’s just that no one has articulated the rules.
In most companies men set these rules. Again, nothing secret here, but men don’t realize that they behave and think differently. They don’t have to explain the rules to other men so it never occurs to them to explain the rules to women.
As women, they will be expected to perform to boys rules as defined in their workplace: This means they need to spend the time understanding what the rules are in their company and industry. If they don’t, they will find others less competent but more adept at playing the game getting promoted instead of them.
Women can be equally competitive if they desire. It’s not a question of competency. Or a skill only boys have. If they want to succeed by competing they can. They just have to learn the rules and practice them.
Find mentors then become one. In every organization or industry there’s someone who’s figured out the rules. Seek them out and know what they know. By the time you do, it’s your turn to mentor someone else.
Collaboration can make you a stronger competitor. The irony is that organizations which collaborate are more effective competitors. When they reach a position of authority, use their instincts to build a fearsome organization/company.
If they prefer to collaborate and don’t want to play by boy’s rules, they need to understand what theircareer choices are. There are plenty of other ways to be a productive member of society other than a position on a corporate org chart.
Understanding the rules and career options doesn’t mean the rules are right or they have to accept them as the only career choices. They can make change happen if they so desire. But they need to understand the personal costs of doing so.
Some find the idea of gender differences uncomfortable. Having fought to have men and women be treated equally, discovering that there may be gender specific hard-wiring for behavior sets up cognitive dissonance. Some simply won’t accept that there are workplace gender differences.
I may be wrong.Perhaps I misunderstood what I’ve seen or that time has changed the workplace significantly. Take this advice as a working hypothesis and see if it matches your experience.
Time will tell whether we gave our daughters good advice.
Customer Development is a stupidly simple idea. It’s one that you can describe in 30-seconds or less. But it took me 3 years and almost 300 pages of 10-point type to describe the concept in my book The Four Steps to the Epiphany. Unlike a traditional business book, The Four Steps is more akin to a reference manual for how to “engineer” a startup – from the initial search for a repeatable business model all the way through the management techniques to transition to a company. Entrepreneurs who use it effectively have dog-eared pages marked with sticky notes.
One of the ways I learn is to teach. My students ask questions I can’t answer and challenge me to solve problems I never considered. At times I’ll do what I consider an extension of teaching; a two-day Customer Discovery/Validation intensive session with a large corporation serious about Customer Development at my ranch on the California Coast.
My last session was with a passionate, smart, entrepreneurial team from a Fortune 100 company. (And if I told you who they were I’d have to kill you.) Their copies of the Four Steps were dog-eared and marked with sticky notes. We spent two days of analyzing and exploring their customer discovery visits just completed across South America, Africa and Asia. Learning which hypotheses survived these visits were eye-openers for all of us. We used what they learned to plan their next steps for additional Discovery, and ultimately Customer Validation.
It’s Easier for Big Companies to Get Meetings – But It’s Not Always a Blessing
When a big company calls prospective customers to set up Discovery meetings, their datebook fills up fast. Execs at higher levels than you’d expect join the meeting eager to hear what the big company has to say about their industry. That’s the good news. The bad news is that the meetings become far more formal and more crowded, than one that a startup would have. This crowd actually dampens the opportunity for learning. Since the meetings attract senior execs everyone around the table waits for the big boss to speak and follows his or her lead. This stifles or shuts down the important “outlier” conversations that drive pivots and iterations in the discovery process.
Solution: try to get a blend of one-on-one meetings along with the group session. And be sure to set expectations for the meeting before it happens.
We’re Not Here for a Sales Call If someone from a large company is flying halfway around the world to visit your company, your presumption is they have something to sell you. Crucial in the Customer Discovery process is not selling…it’s listening. The exploring, probing, gaining reactions is why you’re there. (Of course, if someone forces a purchase order on you and you reject it, you’ve just failed miserably at entrepreneurship.) Disabusing the audience of the notion that the visit is a sales call is vital to the customer discovery mission. Followers of the Customer Development process know that you can’t start selling until you have transformed product, customer and other hypotheses into a validated business model and sales roadmap. (Short-circuiting that process is a major “foul” that often leads to premature business models and suboptimal sales results.)
To potential customers who’ve never been asked for their opinion before, the purpose of a Discovery meeting can be confusing. There are business cultures where the vendor/customer interactions are limited to “here’s what I have to sell, do you want to buy it.”
Solution: spend more time on the “setup” for the meeting. Tell potential customers before you meet, “We’re working on an interesting product and we’d be happy to share where we are in exchange for some feedback. But we are not here for a sales call.”
Getting the Customer to Talk is Even More Challenging There’s no more important skill in Customer Discovery than “good listening.” When a big company shows up, everyone expects an important formal presentation, which is hardly your Discovery mission at all. Structuring the conversation in a way that elicits feedback before you reveal the product hypothesis is essential to getting honest reactions, good or bad. Yet just reading your questions from a list is a real-turnoff. Insert them casually into a conversation and don’t try too hard to get every one of them answered in every meeting.
Solution: One of our favorite hints, from a great post by ash maurya, is to pose problems to the group in a randomized list. “We see these three problems in your industry. Do you agree? Could you rank them in order of importance to you?” This literally forces a discussion and prioritization and is repeatable again and again. “We believe the most important features you need in a supersonic transporter are….” or “Our research tells us that female consumers most want a, b, and c.”
Big Companies are Bred for Large Scale Success When you’re doing disruptive innovation in a multi-billion dollar company, a $10Million dollar/year new product line doesn’t even move the needle. So to get new divisions launched large optimistic forecasts are the norm. Ironically, one of the greatest risks in large companies is high pressure expectations to make these first pass forecasts that subvert an honest Customer Development process. The temptation is to transform the vision of a large market into a solid corporate revenue forecast – before Customer Development even begins.
Solution: Upper management needs to understand that a new division pursuing disruptive innovation is not the same as a division adding a new version of an established product. Rather, it is a organization searching for a business model (inside a company that’s executing an existing one.) That means you may find that revenue appears later than the plan called for, or that there are no customers or fewer than the plan suggests.
Customer Development Without Agile Engineering Is A Plan For Failure Beleving in Customer Development but still retaining waterfall development for engineering and manufacturing is a setup for problems if not outright failure. Even in a large company you can’t do Customer Development without aligning some part of engineering to respond to unexpected customer needs and findings.
Solution: Get engineering buy-in by. Make sure the engineering and manufacturing plans “before” Customer Development don’t look the same as “after” Customer Development.
Spend your Way to Success Usually Results in the Opposite Ironically large revenue goals may lead to largesse in overfunding the new division, with the implicit assumption that dollars can “buy your way to success.” All the money in the world doesn’t negate the painful search for a business model, or the lack of a scalable/profitable one. And new divisions in large companies operate just like startups who get overfunded – somehow their expense budgets always equal at least their funding.
Solution: Eight and nine digit funding before Customer Discovery is a curse not a blessing. Take the money in tranches (equivalent to VC “rounds”) predicated on milestones in finding a repeatable and scalable business model.
There’s an Overhead Cost to Being an Entrepreneur in a big, established corporation Large companies are just plain organized – with rules, HR, finance and more importantly, are built around process and procedures for execution. It’s why so few big companies succeed at true entrepreneurship.
Solution: Assume as a given that as a new division head at least 15% of your time will be spent managing up and protecting down. Few in your own company will understand what you’re up to.
Lessons Learned
Customer Development in large companies has it’s own unique challenges
Some parts of being a big company make it easier, others make being a startup even riskier
One of the attributes of great entrepreneurs is that they are tenacious and relentless. This guest post is from Andrew Elliott of Lottay. Andrew read the Four Steps to the Epiphany, tracked me down at California Coastal Commission hearing in Santa Barbara, and had me meeting with him in a stairwell during a break in my day-long meeting.
Hi, we’re Lottay! We’ve been a startup for the past two years or so and we’ve come to a critical point on this crazy roller coaster ride. Here’s our story:
We started like most entrepreneurs — an idea, an opportunity, and very little money. Our vision was to radically change the gift card industry. We were lucky to learn about Customer Development early on in the life of our startup. It made more sense than our 60 page business plan predicated on a B-school class and a supernatural ability to predict the future. More importantly, we’d witnessed Customer Development’s massive success at another local startup.
We bought Steve’s book, started product development and began reaching out to customers ins search of our first earlyvangelists. Along the way we were fortunate to meet Steve, develop strategic partnerships, and raise a series A round of investment. Confident we were Doing It Right, we pressed forward. We even had some pretty monumental successes. So how did Customer Development fail us? Well, perhaps it’s more accurate to say that we failed customer development.
In retrospect, our mistakes fell mainly into one of two categories:
(1) Failure to follow the process
(2) Failure to be honest with ourselves
If we could travel back in time to that fateful meeting at the Coffee Cat and give ourselves a good talking to, what would we say? Well, it just so happens that we’ve fitted Ross’s 2001 Subaru with a flux capacitor, gotten our hands on some plutonium and we’re about to hit eighty eight miles per hour! Here’s what we plan to say:
Write it Down This seems so obvious, yet it must be said: write down and track the evolution of your hypotheses. It’s something that’s almost too easy to gloss over — keeping track of your hypotheses and the results of your customer development work are vital. Failure to keep track of our hypotheses meant we were never quite clear on what was working and what was not. This meant we had a hard time focusing our development.
It’s your vision damn it! The customer does not define the product or vision for the company. The founders do. In Four Steps to the Epiphany Steve says you’re looking for a niche – he means that you’re going to hear a lot of “No’s” and that’s okay. What’s not okay is letting these non-customers define your vision daily.
Failure to maintain a coherent vision allowed us to pitch one thing, “It’s a virtual gift card you can spend on anything!” while selling something else, “It’s an ecard + money!” After a while even we didn’t know which was our actual vision.
Make Money or Take Money? Focus on revenue from day one. It’s the only reliable metric for success. You may think you’ve found your earlyvangelists but you can only be sure when they start making you money.
Taking outside investment gives you options. But with this money comes temptation. Temptation to focus on growth and worry about revenue later. Temptation to stay the course when your gut tells you it’s time to change. Making revenue your first priority does so many good things for you as an entrepreneur – saves cash, validates customers, and tells you if you have a real business. It’s only a business if you make money.
Fail Fast and Move On Being honest with yourself is perhaps the hardest part of being an entrepreneur. You’ve sold your friends, your investors, and yourself on your vision. You wouldn’t be putting yourself and your family through this if you didn’t believe in your idea. So who keeps you honest and tells you when you don’t have a business? Your customers and your hypotheses.
There may come a time you need to face the fact that the earlyvangelists you thought you had are actually just very polite users. Face the fact that your product won’t be able to make money or scale. Face the fact that your hypotheses are all wrong. And ultimately, face that fact that it’s time to majorly rewrite your vision. The sooner you face these facts the more chances you’ll have to course-correct and win.
The Future? Now that we’re back from the past, how are we moving forward? Well, we’re back to customer discovery. And this time we’re writing it down. In fact, we’re creating a simple software solution that guides us through documenting customer interactions and validating our hypotheses (let us know if you’re interested in testing it). We’re also charging customers and partners right off the bat for our services. And we’re using that money to do more customer discovery and validation. Finally, we’re holding ourselves accountable to our vision and hypotheses.
Disclaimer Keep in mind that our opinions are just that. We may have no idea what we’re talking about. After all we’re just some guys trying to make it in this crazy startup world. We’d love to know what you think. Do these ring true to you? How do you keep track of your vision and hypotheses?Leave a comment or email us at contact@lottay.com.
Lessons Learned
Customer Development is like being Agile. It’s easy to say you’re doing it. Hard to actually do it.
“I never have let my schooling interfere with my education.”
- Mark Twain
Every time I see my graduate students try to teach for the first time, it’s usually so painful I bite my lip. Then I remember the first day I stood up in front of a classroom.
You Hired My first job in Silicon Valley was at ESL (a supplier of intelligence and reconnaissance systems,) I had managed to talk myself into getting hired as a training instructor. (Long back-story here.) The company had a major military contract to deploy an intelligence gathering system to Korea, they needed to train the Army Security Agency on maintenance of the system, the 10 week training course (6-hours a day) hadn’t been written, and the class was supposed to start in 6 weeks.
I convinced them that I knew the type of training military maintenance people need, and I had done some informal teaching in the Air Force. Out of desperation and a warm body right in front of them, they realized I was probably better than nothing, so I got hired.
As I wrote the course, I was handed a couple of books on how to put together a training class for the military and given some advice on how to assemble lessons. But besides my own experience as a student in military technical training classes, I had never taught more than one person at a time.
The Dry Run About a week before the course was due to start, the manager of training said, “Steve, we’d like to see you do a dry run of a class tomorrow. Pick the material you feel most comfortable with teaching and give us a lecture for an hour.”
I didn’t sleep that night. While I had taught my peers in the military how to repair equipment, it had been informal side-by-side training on a lab bench. I had never been in front of a classroom. I was scared and nervous.
The next day I stood up in front of the classroom and in the audience was the rest of the training department, my manager and the manager of the entire intelligence system program.
I don’t remember exactly what class material I taught, but I do know I gripped the side of the podium so hard my fingers hurt as I read my notes and droned on. I was so nervous that I skipped an entire page of notes. In the one or two times I managed to look up, I saw my boss wincing, the program manager putting his head in his hands, and then most everyone drift out of the room. After about 20 minutes my manager said, “Thanks Steve, that’s enough.” He quickly left and when I passed him in the hall, he was in deep conversation with the program manager, and I could hear snippets of my name and the word “terrible.”
Even I knew I had done horribly. I was ashamed and disappointed, and when my manger called me into his office that afternoon, I thought I was going to be fired before the class started.
Teach Like You’re the Student As I sat in his office, I wondered if they would pay me through the end of the month or would they just walk me out the door that day. The latter seemed likely when he said, “I’ve never seen my boss so depressed. He thinks the Army is not going to pay us for the training course if you teach it.” I was waiting for the “you’re fired” words to come out his mouth. Instead, I was blown away when he offered,” Well the good news is that you can’t get any worse.” And he was smiling. He continued, “You figured out 6-airplanes and 3-vans full of computer equipment in six weeks. That’s better than anyone we have on staff could have done. Your lessons are clear and well organized. And most importantly you love this stuff, and it comes through when you talk about it. But we thought you were going to have a heart attack up in front of the room.” I started to exhale. Maybe he wasn’t going to fire me. He laughed as he said, “In the last 15 years I’ve hired lots of training instructors, and something tells me you’re going to be pretty good at it… if you get through the first two weeks.” Then he gave me some advice about teaching that’s stuck with me for more than three decades: “Just pretend you’re teaching you. How would you do that? What would you want to know? What did you dislike when you were taught? What stories would you tell to make it understandable? What would keep you interested and engaged?”
I Love This Job The class started a week later, and the first two days were as painful for me as they were for my students. At first I never left the podium and was afraid to stop reading my notes. But after the second night, the class and I all went out drinking in Sunnyvale, and I realized that my manager was right – my students were exactly like me. What they wanted to know was what I would have wanted to know if I was in that classroom. Over the next weeks as I slowly relaxed, I started to connect with the class. I stopped reading my notes, got out from behind the podium and started telling stories about my own experience and all the things that could go wrong that weren’t in the manual.
Consumer Internet investing seems to have split off from traditional Venture Capital, and is creating a new category of VC’s: Lean VC’s. I think you can blame Customer and Agile Development for a small part of it.
Here’s why.
Electron-based Venture Capital When I first came to Silicon Valley the world of Venture Capital looked pretty simple. VC’s invested in things that ran on electrons: hardware, software and silicon. While individual VC’s inside venture firms specialized in particular domains (PC’s, peripherals, semiconductors, test equipment, operating systems, applications, etc.,) their investments had roughly the same time horizon and were focused around things that used electrons – primarily computing and computing infrastructure.
The VC business took off with the rapid growth of the semiconductor business. Fairchild Semiconductor became the progenitor of a flood of Silicon Valley chip companies and at the same time the adoption of the limited partnership as the model for Venture Firms gave VC’s their own profitable business model. The personal computer business was built on top of the semiconductor business about the same time that the last of the pieces of Venture Capital were falling into place – the 1979 change in the EISRA “prudent man” rule allowing pension funds to pour billions into Venture Funds.
Here’s what the start of Valley chip business looked like on a genealogy map, tracing most all of its DNA back to the first Silicon Valley chip company, Schockley Semiconductor.
Cell-based Venture Capital – The Birth of BiotechVenture Capital In 1980 Genentech became the first IPO of a venture funded biotech company. The fact that serious money could be made in companies investing in life sciences wasn’t lost on the venture community. But the knowledge that VC’s had built investing in electron-based companies didn’t translate to expertise in cell-based or cell-proximate companies. The technologies were different, the time horizons were different, (2 to 5x longer to take a drug through FDA trials ~14 years,) and the regulatory environment was different (barely any in traditional VC investments compared to FDA trials for drugs and 510K approvals needed for medical devices.) Finally the amount of capital needed to take a drug to FDA trials could be enormously expensive, at least 10x more than startup costs at an electron-based company.
The two watershed events for biotech startups were the Bayh-Dole Act of 1980 and the Orphan Drug Act of 1983. Bayh-Dole allowed for private ownership of government funded intellectual property developed in universities while the Orphan Drug Act created incentives for developing drugs for disorders afflicting fewer than 200,000 Americans.
After a while, the only thing Biotech VC’s had in common with their compatriots who invested in electrons was that they both invest. (In some Venture Capital firms they may share the same roof and overhead, but no one is confused, they’re in very different businesses.)
The Rise of the “Lean VC’s” – Consumer Internet Gets Funded
For a few reasons, I’ve been struggling to make sense of all the noise happening in what others have called the Super Angel arena. First, my students are confused about who to talk to and how to think about funding their consumer internet startups. Second, and full disclosure, I’ve invested in a few of these funds; and third my teaching partner Ann Miura-Ko is a partner in one of these funds.
My take is that we are watching an entirely new category of Venture Capital firms emerge. It is as an important a split as when the biotech guys hung out their shingles.
Consumer Internet startup investors are now their own category. I call them “Lean VC’s” to emphasize why they’re different.
(In his indomitable way, Dave McClure describes this shift best, but I have to screen-scrape his posts, paste them into Word and clear the formatting to read them.)
One could argue that there’s nothing new here, as Internet distibution models started in 1995. But in reality they only became mainstream ~5-7 years ago. Most of the social and mobile channels (YouTube, Facebook, Twitter, iPhone, Android) have emerged in just the past 3-5 years. But these VC’s aren’t Lean because they fund startups with web-based distribution models. It’s because the startups are doing something very new that make them “Lean” :
Quickly iterate the product in front of customers.
Drive for a repeatable and scalable business model (revenue in Dave McClure’s investment thesis, “network of scale” in Union Square’s.)
Their capital needs are low at the front end. The advantage of commodity software stacks drops initial startup costs for Internet Commerce companies. (But scaling customer acquisition may take the same amount of dollars as a traditional software startup.)
Lean VC’s are Different The skills needed to succeed as a “Lean VC” are different from those needed for traditional software investing. Previous experience of investing in software companies that hire direct sales organizations and take years to build the product using waterfall development doesn’t translate to expertise in Consumer Internet startups. The technologies are different, the speed of execution, iteration and pivots are different and the time horizons for exits are different, (2 to 5x shorter for a consumer Internet company.)
Finally, the “death of the IPO” and the emergence of the “small market M&A” changes Consumer Internet economics. One of the interesting characteristics of these new “Lean VC” funds is that they can be smaller than the traditional multi hundred million dollar VC fund. The small investments necessary to get a consumer internet startup going enables Lean VC’s to make lots of early bets and double-down when early results appear. (And the results do appear years earlier then in a traditional startup.)
(BTW, just like the Biotech VC’s who may share a building with Electron-based VC’s, you may find a Lean Venture Capitalist sitting under the same roof as a traditional VC. Just make sure they get and embrace the Lean VC principles. The test is, ask them how they differ in their investing philosophy from the rest of their firm.)
Lean Angels Along with Lean VC’s a new class of angel investors has emerged. YCombinator, Techstars, et al, have been described as incubators but in reality they are the new “Lean Angels.” These angels “get” the sea change happening in Internet Commerce. The difference is that unlike Lean VC’s, these angels help their startups rapidly develop the product, but typically don’t add much help in developing the market/customers. And while they provide the initial investment they rarely follow-on with the Series A dollars needed for scale. They’re a great feeder system for the new class of Lean VC’s.
Lessons Learned
Entrepreneurs in the consumer Internet space should look for funding from Lean Angels or Lean VC’s
Lean VC’s are expert in on-line distribution, Agile and Customer Development
They drive for early results inexpensively, and invest heavily when they see results
Their strategies for their startups differ – some focus on revenue, others build large networks of users
One of the toughest problems for entrepreneurs is to keep score as they search for their business model.
Keeping Score
One of the key concepts of Customer Development is writing down your initial hypotheses (guesses) of all the parts of your business model, then updating them with the facts you find outside the building.
Since I first wrote the book Four Steps to the Epiphany I’ve realized that an even better way to keep score is by diagramming each of your business model hypotheses on a whiteboard and updating them as your iterate and pivot. I’ve been experimenting with how to best teach this idea to students in classroom and with startups. My favorite book of how to diagram your business is Business Model Generation written by Alexander Osterwalder. It has the notion that any business model can be drawn with just 9 separate boxes. It’s a great idea.
The Real World
My teaching partner Ann Miura-Ko and I both love the concept of Business Model Generation. However we find using the book to teach and in early stage venture problematic. It makes assumptions about the depth of knowledge about business models that we find that students and startups lack. For example, we find that the distinction between who’s a user and who’s a customer may be obvious to sophisticated strategists in large companies but is often overlooked in a startup. The same issues arise between understanding the difference between a distribution channel and the specific demand creation activities needed to drive customers into that channel. Being able to get these concepts is the difference between startup success and failure. So while we love the book, Ann has been drawing her own business model diagrams you’ll see in the presentation below.
Given Ann and I are such big fans of the Business Model Generation book we were happy to have coffee with Alexander Osterwalder and share our thoughts about what we thought was missing. In hindsight I think we were asking for the business model generation book for dummies (kind of like someone asking me for six steps to Customer Development rather than four,) but Alexander was not only was generous with his time but posted a thoughtful response to our comments.
Business Plans Versus Business Models
Given what I think of Business Plan competitions, it was ironic that I spoke last week at the Clean Tech Open business plan competition conference. I did appreciate the venue and shared my thoughts of how a startup goes from an idea to a business plan to business model to customer development and finally to a venture pitch, all in the presentation below.
Lessons Learned
Gather all your hypotheses in Customer Discovery
Diagram all your hypotheses of your business model
Update the diagram as you gather facts outside the building
Minor iterations will make minor changes to the diagram
If you’ve had a great career what happens to all your knowledge and experience when you retire?
Great Suit My wife and I had dinner last night with a friend of hers from high school. Tom, her husband whom I had never met before joined us as well. I took one look at his suit and guessed “high-powered lawyer. “ (I was right, the suit probably added another $250 per billable hour.)
Over dinner we got chatting, and I found out that besides the great suit, Tom was actually a pretty remarkable guy. He was a trial litigator, one of the guys that slug it out in court in front of a judge and jury. And Tom wasn’t just any trial lawyer. He was the hired gun that Fortune 100 companies and hedge funds bring in when billions are at stake. Listening to some of his stories over dinner was entertaining enough, but after awhile I realized I was hearing something else – this guy played strategy while his opponents were using tactics.
Chess and Military History It turns out that Tom was a student of military history and a chess player. He described preparing for cases like war. “Most trial lawyers play defense. I’m on the offense from day one. In depositions and filing motions I’ll use misdirection to get the opposing counsel thinking I’m heading in one direction, and I’m heading in the other. When I file for a Summary Judgment, it’s usually from a direction my opponents never expected.” He then went on to give me a tour of 30 years of trial lawyer experience.
So I asked, “Did you learn any of this in law school?” He laughed. “I went to Harvard. They didn’t teach war there.” “Do any of your junior partners in your firm know how to do what you do?” “Well they watch me, and I guess they learn by osmosis.”
Then I asked my favorite question.
“When you retire, what happens to all the knowledge and experience you’ve acquired?”
You Can’t Take It With You I think the question caught him a bit by surprise. I explained, “You have a record in winning trials that’s based on a strategy and methodology you developed and you’ve likely have moved the state of the art in your profession – and it’s all going into the trash bin of history – unless you pass it on.
Teach It or Lose It I asked Tom to think about writing down a longer version of the stories he told me over dinner, almost like an autobiography but focused on his career. And for each big trial or milestone summarize it with a “Lessons Learned” section. I observed that at the end of this exercise, he’ll come to one of three conclusions: 1) he has a great collection of war stories to tell while he’s skiing or playing golf or 2) he can make a book out of those stories or 3) buried in the stories and lessons learned was a strategy that was new, unique and worth teaching to future generations of lawyers.
I suggested that he volunteer to guest teach in someone else’ class at a local law school (and where he lived there were plenty) to see if he enjoyed it. His war stories would certainly keep students on the edge of their seats. (If you were a law school student having him come in to your class and say, “The first time you run into me, I’d make you wet your pants” might get your attention.)
But more importantly this would help him decide if he wanted to teach as an Adjunct Professor after he retired. If as I surmised, he actually did push the state of the art in his field forward and his teaching went beyond war stories to a theoretical framework, most schools would be happy for him to develop and teach a class.
Why Do It? I suggested that there were four reasons he ought to take teaching seriously. First, his accumulated knowledge will disappear when he does. Second, it’s incumbent on all of us to make those who come after us smarter than we were. Third, having students question your assumptions makes you smarter (and at our age growing new neurons are helpful,) and finally fourth, for those of us whose career was on a stage, teaching is just another stage with an appreciative audience.
Not Just For Lawyers Driving home for dinner, I realized that the same advice for Tom and lawyers would work for professionals in any domain; doctors, engineers, venture capitalists, CEO’s or even entrepreneurs. Don’t let your knowledge and experience die with you.
Lessons Learned
If you don’t teach it or write it down, the accumulated knowledge of your career is gone.
War stories about your career can be entertainment, or even better if you want to teach, make them the basis of a strategy and methodology worth passing on.
Retirement doesn’t have to be only about golf and skiing.
Startup CEO’s can’t delegate sales and expect it to happen. Customer Validation needs to have the CEO actively involved.
Here’s an example in a direct sales channel.
Customer Development Diagnostics over Lunch A VC asked me to have lunch with the CEO of a startup building cloud-based enterprise software. (Boy did I feel like Rip Van Winkle.) The board was getting nervous as the company was missing its revenue plan.
These lunches always start with the CEO looking like they had much better things to do. Before lunch even came the CEO ticked off the names of forty or so customers he talked to during the company’s first nine months and gave me a great dissertation on the day-in-the-life of his target customers and what their problems were. He went through his product feature by feature and matched them to the customer problems. He talked about how his business model would make money and how the prospects he talked to seem to agree with his assumptions.
It certainly sounded like he had done a great job of Customer Discovery.
Sales Process Next, he took me through his sales process. They had five salespeople supported by two in marketing. (They had beta customers, using but not paying for the product.)
Over lunch the CEO told me he had stopped talking to customers since he had been tied up helping get the product out the door and his VP of Sales (a successful sales executive from a large company) had managed the sales process for the last six months. In fact, the few times he had asked to go out in the field the VP of Sales said, “Not yet, I don’t want to waste your time.”
Too Good to Be True For the first time I started squirming in my seat. He said, “I insist on getting weekly status reports with forecasted deal size and probability of close. We have a great sales pipeline.” When I asked how close any of the deals on the forecast were to getting closed, he assured me the company’s two beta customers—well-known companies that would be marquee accounts if they closed—were imminent orders.
“How do you know this?” I asked. “Have you heard it personally from the customers?”
Now it was his turn to squirm a bit. “No, not exactly,” he replied, “but our VP of Sales assures me we will have a purchase order in the next few weeks or so.”
I put my fork down. Very few large companies write big checks to unknown startups without at least meeting the CEO. When I asked if he could draw the sales road map for these two accounts that were about to close, he admitted he didn’t know any of the details, given it was all in the VP of Sales’ head. Since we were running out of time, I said, “Your sales pipeline sounds great. In fact, it sounds too good to be true. If you really do close any of these accounts, my hat is off to you and your sales team. If, as I suspect they don’t close, do me a favor.”
“What’s that?” He asked, looking irritated.
“You need to pick up the phone and call the top five accounts on your sales pipeline. Ask them this question: if you gave them your product today for free, are they prepared to install and use it across their department and company? If the answer is no, you have absolutely no customers on your forecast who will be prepared to buy from you in the next six months.”
He smiled and stuck me with the tab for lunch. I didn’t expect to hear from him ever again.
What If the Price Were Zero? Less than two weeks later, I got a call and was surprised to hear the agitated voice of the CEO. “Steve, our brand-name account, the one we have been working on for the last eight months, told us they weren’t going to buy the product this year. They just didn’t see the urgency.” Listening, I got the rest of the story.
“When my VP of Sales told me that,” he said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I’m still stunned by the answer. They said the product wasn’t mission critical enough for their company to justify the disruption.”
“Wow, that’s not good,” I said, trying to sound sympathetic.
“It only gets worse,” he said. “Since I was hearing this from one of the accounts my VP of Sales thought was going to close, I insisted we jointly call our other ‘imminent’ account. It’s the same story as the first. Then I called the next three down the list and got essentially the same story. They all think our product is ‘interesting,’ but no one is ready to put serious money down now. I’m beginning to suspect our entire forecast is not real. What am I going to tell my board?”
My not-so-difficult advice was that he was going to have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, and then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it’s time to update your resume.)
The Phantom Sales Forecast
The implications of a phantom sales forecast meant something fundamental was broken. In talking to each of his salespeople, he discovered the sales team had no standardized sales process. Each was calling on different levels of an account and trying whatever seemed to work best. This was just a symptom of something deeper – while they thought they understood the target customer their initial hypotheses from Customer Discovery were wrong. But no one had told the CEO.
He realized the company was going to have to start from scratch, Pivot back to Customer Discovery and find out how to develop a sales road map. He presented his plan to the board, fired the VP of Sales and kept his best salesperson and the marketing VP. Then he went home, kissed his family goodbye, and went out to the field to discover what would make a customer buy. His board wished him luck and started the clock ticking on his remaining tenure. He had six months to get and close customers.
Customer Validation The CEO had discovered what happens when you do a good job on Customer Discovery but get too “busy” for to personally get involved in Customer Validation. It wasn’t that he didn’t need a VP of Sales, but he had entirely outsourced the Validation step to him. Until a scalable and repeatable business model is found the CEO needs to be intimately involved in the sales process.
Lessons Learned
Ownership of Customer Validation belongs to the CEO.
A VP of Sales can assist but the CEO needs to answer:
Do I understand the sales process in detail?
Is the sales process repeatable?
Can I prove it’s repeatable? (Proof are multiple full-price orders in sufficient quantity.)
Can we get these orders with the current product and release spec?
Do we have a workable sales and distribution channel?
Am I confident we can scale a profitable business?
As a founder I fought with VC’s over vesting as they brought in a new CEO and walked me out the door. As a board member I negotiated with founding CEO’s over vesting when I thought it was their time to go. At best this is an argument where no one wins, at worst it’s like a nasty divorce.
I’ll offer that both entrepreneurs and VC’s have the wrong model for founding CEO equity compensation. The customary vesting model has founders vest their stock over 4-years, and when the founding CEO gets in over their head the VC’s bring in professional management. More often than not the founding CEO leaves the company. The fallacy is believing that a founders value is evenly distributed over four years. We now have three decades of experience that says otherwise.
Preparing For Chaos Every VC knows that the founding CEO is the individual you throw into the chaotic battle of a startup. Investors are praying they’ve backed a founder who can think creatively and independently, because more often than not, conditions on the ground change so rapidly that the original well-thought-out business plan becomes irrelevant. They’re hoping they funded a CEO who can manage chaos and uncertainty, is biased for action and isn’t waiting around for someone else to tell them what to do. They’re betting that the founding CEO can quickly separate the crucial from the irrelevant, synthesize the output, and use this intelligence to create islands of order in the all-out chaos of a startup. And that they’ll emerge from this fog of war with a scalable business model.
They also know that most founding CEO’s don’t scale past the early stage.
That’s the source of the trouble. Most founding CEO’s don’t know that they’re cannon fodder in the search for a business model.
It’s My Idea and Hard Work Some founding CEOs believe the value they bring to their startup is their idea and the time and energy they put into their company. In their mind, since they thought of the idea of the company, spec’d the product, found the first customers and worked their tails off, they are entitled to vest all their stock over time and run their company.
Where’s My Liquidity Event Some VC’s feel that if a startup has grown past the founder’s ability to manage and scale (and hasn’t had a liquidity event,) they should be able to remove the founding CEO and (at best) walk them out the door with only the stock they vested to that day.
It’s About Finding the Business Model I’ll posit that both views are wrong. Lets start with what the real job of the founding CEO’s job is: to find a repeatable and scalable business model. The goal of your business model can be revenue, or profits, or users, or click-throughs (or even just to get the technology into production) – whatever the founders and their investors have agreed upon.
If you don’t find this business model there is no company.
The odds are if the founder is going to find the first business model it’s going to be in the first few years. Yet the traditional vesting model ignores this. It assumes that founders contributions are linear over 4-years. Not only is this unfair it has the founding CEO focussed on the wrong goal – hanging on as long as they can to vest their stock. Why on earth would investors want to have the incentives set up this way? 30 years of accumulated experience says these perverse incentives actually diminishes the value of their investment.
It’s time to rethink how we vest stock for founding CEOs.
The New Deal The founding CEO vesting model should start with a new deal between VC’s and founders. Recognize that a founders value is non-linear over 4 years and heavily weighted towards the chaotic first few years. Agree that the founder is being rewarded not just for the idea or technology of the company but rather for finding a way to make money.
Founding CEO’s need to agree that it’s rare that founders are the right people to take a startup through the transition to build and scale it into a company. Instead, it’s likely that after they do the hard work of finding the business model, the company will need to hire their replacement to grow the company to the next level.
The New Founding CEO Vesting Model Therefore, if the founding CEO gets the company to a repeatable business model they deserve to vest all their stock if they are removed. If they fail to find a business model, by taking investors money they’ve implicitly agreed they can be walked out the door. (But can keep the stock they’ve vested to date.) Specifying what the metrics are for a repeatable business model is what the board and founders should be doing in the first place. This new deal would keep everyone focused on the search for the model.
I’ll suggest that this new deal more accurately reflects the time-weighted contributions that founding CEO’s make and more accurately aligns founders and investors interests.
Lessons Learned
The job of the startup CEO is to find a repeatable/scalable business model.
The contribution of the founding CEO is not linear over 4-years.
If the founding CEO gets the company to a repeatable business model they deserve to vest all their stock if they are removed.
Accountants shouldn’t be putting together the vesting schedule.
If you take funding from a venture capital firm or angel investor and want to build a large, enduring company (rather than sell it to the highest bidder), this isn’t the decade to do it. The collapse of the IPO market and dysfunctional math in the venture capital community has stacked the odds against you.
Here’s why.
The Golden Age for Entrepreneurs and VC’s The two decades from 1979 when pension funds fueled the expansion of venture capital to 2000 when the dot-com bubble burst were the Golden Age for entrepreneurs and venture capital firms. VC’s were making investments every other financially prudent institution wouldn’t touch – and they were printing money.
The system worked in predictable and profitable ways. VC’s invested their limited partners’ “risk capital” in a portfolio of startups in exchange for illiquid stock. Most of the startups they invested in either died by running out of money before they found a scalable business model or ended up in the “land of the living dead” by never growing (failing to Pivot.)
Startup lifecycle in an IPO Market
But a few startups succeeded and grew into profitable companies. Their venture investors made money by selling their share of these successful companies at a large multiple over what they originally paid for it. One of the ways most predictable ways for an investor to sell these shares was to take a company “public.” (Until 1995 startups going public typically had a track record of revenue and profits. Netscape’s 1995 IPO changed the rules. Suddenly there was a public market for companies with limited revenue and no profit. This was the beginning of the 5-year dot-com bubble.)
During the decade between 1991 and 2000, nearly 2000 venture backed companies went public. Take a look at the chart below. (It includes venture funded startups in all industries, from software to biotech. Source: NVCA.)
Number of Venture Backed Liquidity Events 1991-2000
The size of the red bars (IPO’s) versus blue (mergers and acquisitions) illustrates that while venture-backed startups did get acquired, the IPO market was booming.
Free At Last Going public did two things for your company. Your company had money in the bank to expand your business, scaling the company from the “build” stage into the “grow” stage. But even more important, your VC’s could sell off their ownership of your company. This changed their interest from managing your board for their liquidity to managing the board for all shareholders. Most VC’s would get off of boards of companies that went public.
Success Means That You’re Acquired The public markets for venture-backed technology stocks never really recovered after the collapse of the dot-com boom. Fast forward to today and take a look at the last ten years of IPO’s and M&A’s in the chart below, and you’ll see why life is different for entrepreneurs.
Number of Venture Backed Liquidity Events 2000-2010
Depending on your industry, in this decade it’s 5 to 10x less likely that your company will have an IPO as an exit. And what the chart doesn’t show is that the dollar amount of the deals are significantly smaller than the last decade.
Since there’s no public market for the shares your venture investor has bought in your startup, the most reasonable way for a venture firm to make money is to have you sell your company to another company. But unlike an IPO where you sold stock to the public and got to run your company, in an acquisition your company is gone, and the odds are in a year or so you will be too.
Startup Lifecycle Today
VC “Plan B” None of this has gone unnoticed by the venture community. Some of the old-line venture firms have changed their strategy, but some are still locked into last decade’s model while the partners are living off of their management fees and go through cargo cult like rituals. You can tell who they are by how often they remind you “this is the year the IPO market will come back.” (If the limited partners of these VC’s acted like real fiduciaries rather than waiting for the end of life of the fund, more than half of old-line venture firms would have shut themselves down today.)
New, agile and adroit venture firms with new business models have emerged to deal with the reality that 1) web 2.0 startups require significantly less capital to start, 2) exits for venture firms are predominately acquisitions, and 3) a venture firm with a smaller fund <$150M matches these exits. Floodgate, Greycroft, Union Square Ventures, True Ventures, etc. are example of this class of firm. (Raising a VC fund in this environment had it’s own perils.) And the explosion of private Angel firms continues to fuel this new ecosystem.
Other VC’s who invest in Information Technology have taken a different approach. They’ve created virtual IPO’s for founders and employees via late-stage private financing. It has put a per user dollar value on these sites and these few startups will be the next likely IPO candidates. In their short time as a fund, Andreessen Horowitz seems to be on top of this game with their investments in Facebook, Skype and Zynga.
What About Us? But not all industries are as capital efficient as the Web or Information Technology. Biotech, medical devices, semiconductors, communications and CleanTech require significantly more capital to build and scale before they can generate profits. It’s in these industries that the lack of a public market has taken the heaviest toll on entrepreneurs and their startups. Great companies with innovative ideas have simply died not having the cash to scale. VC’s who would have normally kept writing checks were faced with no public exits and cut them off.
Some of these industries have turned to the U.S government for funding. Elon Musk has not only tapped the feds for his electric car startup Tesla, but also received hundreds of millions for his space launch company – SpaceX. Other Clean Tech companies have tried this approach as well. Yet while the U.S. government doles out funds to connected entrepreneurs, it lacks an integrated strategy to deal with the lack of public market financing for critical growth industries.
It may be that these entrepreneurial industries suffer the same fate as manufacturing in the U.S.- they die out of benign neglect and a lack of a coherent understanding of the role of risk capital in our national interest.
What Does it Mean to an Entrepreneur? If you’re starting a software company, your exit is most likely a sale to a larger company. This decade has been a Darwinian filter – only the very best companies will survive as standalone companies.
If you’re starting a company in other, capital intensive industries, it’s no longer just about having great technology. You need a plan for partnership and long term funding from day one.
In either case Customer Development provides entrepreneurs with a methodology for being capital efficient.
We live in interesting times.
Lessons Learned
Advice that’s more than 5 years old is obsolete.
Software startups are most likely to exit as an acquisition.
Being acquired has lots of math challenges about your valuation, amount of money raised, percent of founder ownership, type of investor, etc.
Non-software companies need to be thinking much deeper and further than ever before about search, build, grow funding strategies. It’s no longer just about building great technology.
Customer Development provides entrepreneurs with a methodology for being capital efficient to scale when the funding environment demands it.
I started working when I was 14 (I lied about my age) and counting four years in the Air Force I’ve worked in 12 jobs. I left each one of them when I was bored, ready to move on, got fired, or learned as much as I can.
There was only one job that I quit when I feared for my life.
Life Is Good The Vietnam War had just ended and I was out of the Air Force back in college living in Ann Arbor Michigan. Colors other than olive green or camouflage slowly seeped back in my life as “Yes sir, and no sir” faded away. Unlike my previous attempt at college as a pre-med, four years working with electronics convinced me that perhaps I ought to study engineering.
Civilian life was good, the government was paying my tuition and I got a college work/study job in the University of Michigan physics department. After a few weeks, the Physics lab staff realized I knew something about repairing electronics (you try fixing a sodium-iodide scintillation detector without a manual.) I got asked, “Would you like to work at the nuclear reactor?” I thought they were joking. “The university has its own nuclear reactor?”
Oh man, something really new to learn. “Heck yes, sign me up.”
Nuclear Reactors on Campus Starting in 1953 the U.S. built over a 150 research reactors. Much smaller than the ~500-1,500 megawatt nuclear reactors that generate electricity, by the late 1960s these 1 to 10 megawatt reactors were in 58 U.S. universities. In addition, 40 foreign countries got research reactors in exchange for a commitment to not develop nuclear weapons. (But these reactors used weapons grade Uranium-235 for their cores, and by the late 1970’s we realized it wasn’t a good idea to be shipping highly enriched uranium overseas.)
My first day in the reactor electronics lab I got a lecture from the health physics department. I was given a film-badge (a dosimeter to measure whole body radiation) and taught how to use the hand and foot monitors (to prevent radioactive contamination from spreading outside the containment dome.)
Scram Lots of things could go wrong in a nuclear reactor – loss of cooling, power failure, jammed control rods, reactor power excursions, etc. While a reactor failure can’t create a nuclear explosion, if its core is uncovered long enough it can generate enough heat to melt itself, with all kind of nasty consequences (see Three Mile Island and Chernobyl.) To “scram” a reactor means an emergency shutdown by inserting neutron-absorbing control rods into the core. This stops the nuclear chain reaction. My job in the reactor electronics lab was to rebuild the reactor “scram system.”
Ford Nuclear Reactor at the Phoenix Lab
The scram system had three parts: the mechanical part (the control rod drives and electromagnetic latches), the electronic part (comparators circuits and trip logic), and the sensors (to measure neutron flux, core temperature, pool water level, etc.)
The 20-year old electronics in our existing scram system were based on vacuum tubes and had the annoying habit of scramming the reactor every time a thunderstorm was nearby. And summertime in the Midwest has lots of thunderstorms. The Nuclear Regulatory Commission had approved a transistorized version of the electronics. My job was to build the approved design, retrofit it into the existing power supplies and integrate it with the existing mechanical systems and sensors.
But first I was going to see the reactor.
Cerenkov radiation Over time I would get used to visiting the reactor, but the first visit was awe-inspiring. Entering the containment building through the air lock, my eyes took a few seconds to adjust to the dim light. The first thing I saw was a gigantic mural of the earth rising over the moon painted on the side of the dome. After another few seconds I realized that the mural was illuminated by an unearthly blue glow coming from what looked like a swimming pool below it. My eyes followed the source of the light down to to the pool and there I first saw the 2 MW nuclear reactor in the bottom of the swimming pool – and it was generating its own light. When I could tear my eyes from the pool I noticed that in the far end of the building was a glass wall separating a room bathed in red light, where the reactor operators sat at their console. The lab manager let me stand there for a while as I caught my breath. Hollywood couldn’t have set the scene better.
As we walked towards the pool I learned that the bright blue light was Cerenkov radiation from the reactor core (electrons moving faster than the speed of light in water polarizing the water molecules, which when they turned back to their ground state, emitted photons.) We briefly walked across a bridge that spanned the pool and stood directly over the core of the reactor. Wow. They were going to pay me for this?
Dose Roulette Over the next few weeks, as I began work on the scram system, I got to know the control room operators and others on the staff. Most of them were ex-Navy reactor technicians or officers. They had been around nukes for years and were bemused to find an ex Air Force guy among them.
One of their weekly rituals was to read the bulletin board for the results of the dosimeter readings. Since most of my time was spent outside the containment dome my radiation exposure numbers were always zero. But there was a bizarre culture of “you’re not a real man until you glow in the dark” among the ex-Navy crew. They would celebrate whoever got the highest dose of the week by making them buy the beer for the rest.
After spending the last four years around microwaves I had become attuned to things that you couldn’t see but could hurt you. In the Air Force I had watched my shop mates not quite understand that principle. On the flightline they would test whether a jamming pod was working by putting their hand on the antenna. If their hand felt warm they declared it was. When I tried to explain that the antenna wasn’t warm, but it was the microwaves cooking their hand, they didn’t believe me. There were no standards for microwave protection. (I always wondered if the Air Force would ever do a study of the incidence of cataracts among radar technicians.)
You Buy The Beer In a few months I had the new scram system ready for debugging. This required connecting the new electronics to the neutron detectors in the pool that monitored the core. We timed this for the regular downtime when used fuel elements were swapped out and they had lowered the pool water level for easier installation. I remember standing on the bridge right over the reactor core watching as the reactor techs remotely connected up the cables to my electronics. I leaned over the bridge to get a better look. By now the reactor was so familiar that I didn’t think twice of where I was standing.
A week later as I was about to enter the dome, I heard someone congratulate me and ask when I was going to buy the beer. They were pointing to the Health/Safety printout on the wall. In one week I had managed to get close to my annual allowable radiation dose (~5 rems?).
In my mandatory talk with the the safety officer to figure out where I got exposed, I remembered hanging out over the core on the bridge. The heavy water in the pool was both a moderator and a radiation shield. With the pool level lowered I shouldn’t have been on the bridge. I had been in the wrong place at the wrong time.
“Don’t do it again” was his advice.
Career Choices
That week I finished up the installation and resigned from the lab. While the radiation dose I received was unlikely to effect my health, the cumulative effect of four years of microwaves and the potential for more unexpected “winning the dosimetery lottery” convinced me to consider alternate jobs in electronics.
In some sense my career in startups was steered by deciding to avoid future jobs with gamma rays or high-power microwaves.
But I sure learned a lot about nuclear reactors.
—————–
Postscript: a year and a half after I left, the power reactor at Three Mile Island had a core meltdown. For years I would worry and wonder if I had wired my scram system correctly.
Lessons Learned
Things you can’t see can hurt you (microwaves, gamma rays, toxic bosses.)
No job is worth your health.
If it seems dangerous or stupid it probably is.
Rules and regulations won’t stop all possible mistakes.
Taking Sides Are you are born with innate entrepreneurial talent or can you can be taught to operate like an entrepreneur?
Fred Wilson of Union Square Ventures, Jason Calacanis, founder of Mahalo.com, and Mark Suster of GRP Partners, have all weighed in on the nature side – you’re born being an entrepreneur or you’re not.
Mark Suster, Vivek Wadhwa and Patrick Chung, Partner of New Enterprises Associates debated the subject on April 21st at Stanford. I’ll was the moderator (referee).
Take a look at the video below.
I thought it was a pretty good talk and worth listening to.
My summer has circled around serendipity and three presentations I’ve given.
Full Circle from Yosemite Nine years ago I took my young daughters on a 7-day pack trip riding mules at 10,000 feet to the Yosemite High-Sierra camps. Granite mountains and alpine green meadows during the day, unblinking stars in the frigid August nights. At a campsite almost two miles high our daughters adopted a young couple, and over the campfire I found out they were Stanford MBA’s and entrepreneurs. Instead of ghost stories they were the first to hear the ideas of what would become Customer Development.
Fast forward to today. One of those students, Shawn Carolan, is now a partner at Menlo Ventures. When we were looking for funding for IMVU (the company where Eric Ries first implemented Customer and Agile Development and where the Lean Startup was born,) I thought of Shawn. He became the first venture investor and “present at the creation.” If you’re doing Customer Development/Lean Startup, Shawn is a great guy to have as an investor. He’s lived it and gets it.
Recently, Shawn invited me to share the Customer Development story at Menlo Ventures annual CEO conference.
(I’ll show you the slides a bit later in this post.)
Let’s Get Together Every 15 Years About a month ago I got a phone call from Alan Patricof of Greycroft Partners who saw the article about Lean Startups in the NY Times and invited me to talk at their CEO conference. After a few minutes on the phone, Alan and I realized that we had met 15 years ago when his firm looked at investing in my last startup, E.piphany.
It’s kind of hard not to know who Alan Patricof is. He built APAX Partners into one of the largest VC firms on the East Coast and in Europe. He started a new venture firm when he realized that that the rules had changed for the venture business – VC’s could no longer expect the same kind of returns they got in the past through an IPO. Instead, he realized that most VC-backed startups would exit through a merger or acquisition- at a sale price of $20 to $100 million.
One of the benefits of speaking at this conference was getting to know VC’s on the east coast and LA. The Greycroft team and Mark Suster of GRP Partners provided lots of local color. (Mark had an amusing summary of the conference here. Mark is the guy I would call if I was doing a deal in LA and his blog should be on your reading list.)
You are Here When I was in a startup, I remember being so focused on my daily tasks of getting customers and running the business that I had no time to consider “why” I was doing what I was doing. I had even less time to consider how to differentiate what were the right things to do in startup versus a larger company. The talk I gave to the startup CEO’s at both Menlo Ventures and Greycroft Partners was a big picture perspective about how startups differ from large companies and where customer and agile development fit. The talk integrated a series of posts I’ve written since the beginning of 2010: “What is entrepreneurship? The Four types of entrepreneurial organizations, Innovation and entrepreneurship in large companies and The role Pivots play in Customer Development.
18-Hour Flight for a 45 Minute Talk
Truth be told, I went to NY for the Greycroft conference because I was already heading east to Tel Aviv for a 45 minute talk. While flying 18 hours to give a 45-minute talk might not seem rational, in fact it provided the rationale to visit a part of the world my wife and I had never seen. I turned the 45-minute invitation into a three week trip. New York to Cairo, Aswan, Abu Simbel, Luxor, Tel Aviv, Haifa, Tiberias and Jerusalem.
As a country, Israel has the highest ratio of scalable startups per capita. A high percentage of Israeli startups are founded by entrepreneurs who served in Unit 8200 and military intelligence. They are agile, resourceful and aggressive. In the dot-com bubble Israel had more technology companies listed on the NASDQ exchange than all of Europe. Today Israeli companies solve technology problems then typically sell out to a larger U.S. firm.
While this is an enviable track record, my talk observed that solving just the technology problems and selling out meant that Israeli companies did not become adept at understanding customer needs. (And in Israel you can’t just get out of the building to understand customers, you need to get out of the country.) Given the current Israeli economic and venture climate having great technology is no longer enough. I observed that this may be the time for Israel to take entrepreneurship to the next step and teach their startups the skills needed to grow from flipping technology startups to building enduring companies.
I used the metaphor of fighter pilots (who have to constantly adapt in real-time) versus military intelligence (who have time to analyze and debate the right answer.) John Boyd of OODA Loop fame got a starring role in the talk.
It went over like a lead balloon.
(Slides 43-49 and 81-89 are the ones that differ from the Greycroft presentation.)
BTW, the schedule of my future talks are now on Plancast.
The role of a founding CEO in a startup searching for a business model is radically different than a CEO building and growing a company. Some VC’s get it, others may not. So if you’re the founder of a startup, you may want to consider who you take money from.
Is Your VC Founder Friendly? How do you figure out which VC firm is best for you? Here are five questions to consider.
Certain VC’s like the new class of Super-Angels and small VC funds specialize in the early stage of a startup where you are searching for a business model. And some larger funds that specialize in later stage deals may have a partner or two who likes to invest at this stage. (Some VC’s invest solely on technology breakthroughs and assume they’ll find a market later.)
Early stage investors have different insights then those investing in a later stage. They understand that now’s not the time to hire a senior VP of Sales to start to scale the sales force or to look for a finance department to create income statements that say zero each month. These VC’s are skilled in helping you search for the business model.
If they haven’t done many early deals before a business model is found, ask them why they are interested in you? Is it for your technology? Your potential business model?
Do They Get Customer Development? For a founder there’s nothing worse than searching for a business model day after day and then sitting in a board meeting with a VC who asks about some detail of year 5 of your revenue plan.
Ask potential investors, how will they measure progress for the company and you as a CEO? Do they have metrics and a methodology they use for early stage companies that differs from companies that have already found a business model? Have they heard about Customer Development? Lean Startups? Can they tell you what you should be doing in Customer Discovery and Customer Validation? If not, do they have a better methodology?
Who Do They Hang With? Investors who have successful ex-founders who you can call for advice, grab a coffee with or get on your advisory board is a good sign. (And a sign that their ex-founders still like them.)
VC’s who have ex-CEO’s who took over from the founder and built the startup into a multi- $100 million company can give great advice about your growing company’s infrastructure, but if you are still searching for your first customer, they may not be much help. (In fact, unless they’ve been founders themselves they usually provide bad advice.) VC’s with formerly high-ranking government officials and Fortune 1000 CEO’s as advisors may be wonderful to help you grow your company in a later stage but not helpful now. (Unfortunately the odds of you being the CEO at this future stage are pretty low.)
How many of their founders are still with their company? Most early stage VC’s are betting on the founders to both deliver the product and to find the business model. At this stage, firing the founder is not a strategy, it’s an act of desperation.
By the time the company gets to the build-stage (the Transition) what differentiates VC’s is how many turn the founders into builders versus relying on bringing in new, more experienced management to lead the transition. As a founder, you should ask: What percentage of the firm’s companies still have founders as the CEOs? In any active role? If the number is less than 25%, you may want to think twice. Ask to talk to some of the founders who are no longer with their startups. I’ll bet you get some interesting stories.
Will The VC Tailor Your Vesting to Your Contribution? Most founders don’t make it past the build stage in a startup. Almost invariably the new CEO will comes in and complain about how disorganized the place is and then does a wonderful job in putting policies and procedures in place. Yet none of this would be possible if the founder hadn’t created the company in the first place. Typical vesting of your stock is over a four-year period, yet the founder’s contribution is heavily weighted to the first few years.
Over the years I’ve become a bigger and bigger believer in some sort of accelerated vesting for the founders tied to finding the business model. There have been suggestions of a different class of stock for founders here and good general advice in VentureHacks here.
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All these suggestions are written as if you had a choice of who to take money from. Most of the time you’ll take whosever check will cash. But if you do have a choice, asking these questions will keep you from being surprised in a board meeting.
Lessons Learned
What phase of the company lifecycle are you?
What phase do your VC’s typically invest in?
What type of advisors does your VC have?
What percentage of this firm’s former founders are still running their companies?
What metrics are they going to use to measure progress in a board meeting?
Who is an entrepreneur really? It turns out that there are four distinct types of entrepreneurial organizations; small businesses, scalable startups, large companies and social entrepreneurs. They all engage in entrepreneurship. Yet entrepreneurs in one class think that the others aren’t the “real” entrepreneurs. This post looks at the differences and similarities and explains why there’s such confusion.
Small Business Entrepreneurship My parents came to the United States through Ellis Island in steerage in sight of the Statue of Liberty. As immigrants their biggest dream was opening a small grocery store on the Lower East Side of New York City, which they did in 1939. They didn’t aspire to open a chain of grocery stores, just to feed their family.
My parents were no less of an entrepreneur than I was. They went on an uncharted course, took entrepreneurial risk and only made money if the business succeeded. The only capital available to them was their own savings and what they could borrow from relatives. Both my parents worked as hard as any Silicon Valley entrepreneur but with a different definition of a successful business model; when they made a profit, they could feed our family. When business was bad they figured out why, adapted and worked harder still. They were only accountable to one and other.
Today, the overwhelming number of entrepreneurs and startups in the United States are still small businesses.
Scalable Startup Entrepreneurship Unlike my parents, Fred Durham and his partner Maheesh Jain started the now $100+ million CafePress, knowing they wanted to build a large company. Founded in offices smaller than my parents grocery store, Fred and Maheesh’s vision was to provide a home for artists who made personalized products assembled in a just-in-time factory that today delivers a customized gift each second. Once they found a profitable business model they realized that scale required external venture capital to fuel rapid expansion. With venture capital came accountability to board members, forecasts, and other people’s agendas. Success for a scalable startup is a three-times (or more) return on the investor’s money – either by a public offering of stock or by selling the company.
Scalable startups in technology centers (Silicon Valley, Shanghai, New York, Bangalore, Israel, etc.) make up a small percentage of entrepreneurs and startups but because of the outsize returns attract almost all the risk capital (and press.)
Large Company Entrepreneurship At the end of 1980, IBM decided to compete in the rapidly growing personal computer market. They were smart enough to realize that IBM’s existing processes and procedures wouldn’t be agile enough to innovate in this new market. The company established their new PC division (called Entry Systems), as a Skunk Works in Boca Raton Florida a 1000 miles from IBM headquarters. This small group consisted of 12 engineers and designers under the direction of Don Estridge. Success for this new division meant generating substantial revenue and profit for company.
The division developed the IBM PC and announced it in less than a year. Three years later the division had sold 1 million PC’s, had 9500 people and a billion dollars in sales.
Don Estridge’s paycheck and funding for the division came from IBM and he reported up the organization, but in his own division he was no less entrepreneurial than Michael Dell or Steve Jobs – or Fred Durham or my parents.
Social Entrepreneurship Irfan Alam, a 27-year-old from the Indian state of Bihar started the Sammaan Foundation to transform the lives of 10 million rickshaw-pullers in India. Irfan got banks to finance rickshaw-pullers and designed rickshaws that can shelve newspapers, mineral water bottles and other essentials for rickshaw passengers. These rickshaws carry ads and the pullers get 50% of the ad revenue, the remainder going to Sammaan. The rickshaw-pullers end up as owners after re-paying the bank loan in installments. Irfan started off with 100 such rickshaws in 2007 and have 300,000 today.
Irfan doesn’t take a salary but he is as focused on scalability, asset leverage, return on investment and growth metrics as any Silicon Valley entrepreneur ever was.
Summary If you put the four entrepreneurs in the room you would understand what they had in common- they were resilient, agile, tenacious and passionate – the four most common traits of any class of entrepreneur.
Also in common, each of their businesses initially were searching for a business model, and each was instinctively executing a customer discovery and validation process.
Yet there are obvious differences in each type; personal risk, size of vision and goal.
More on this later.
Lessons Learned
Four different types of entrepreneurship: Small Business, Scalable, Large Company, Social.
All searching for a sustainable business model.
Regardless of type, entrepreneurs have common characteristics: resilient, agile, tenacious and passionate.
Differences include level of tolerance of personal risk, size and scale of the vision and their personal financial goal.
It is a rare company that realizes it is time to fire the CEO when the financials are good but the business is fundamentally heading for a cliff. For me, I learned this lesson first hand. I had joined the board of a $200million public company that 15 years earlier had single-handily created an industry. The company had innovated, found a business model, grown successfully but now even as revenues continued to grow, the company was slowly but surely dying.
There’s nothing harder than making radical changes when the numbers look great.
Lifecycle The company’s two co-founders had created a new technology and an innovative business strategy. The engineering co-founder had created a consumer electronics security product that created an entirely new category. The other founder, the business guy, managed to get its product legislated into consumer electronics devices. After the initial few years of technical innovation, they found their business model in licensing and over the next decade and a half grew into a $200 million company.
As the revenues grew, engineering continued to pursue sustaining innovations- incremental improvements on its core technologies.
At the same time its business strategy became operational execution focused on licensing and legal to collect royalties.
Execution Over time the co-founder responsible for the original business innovations departed. While a large loss, it wasn’t fatal as the company now was executing a repeatable business model. The new CEO was promoted from inside the company and did an excellent job of running the company. Even though the company was in Silicon Valley, he ran it like it was in Kansas: no frills, no hype, no crazy expenditures, just year after year of increasing revenue and profits. And year after year he managed to come out on top renewing the licensing contracts with Hollywood studios, (who were no pushovers in negotiations). It was impressive.
We Think We Need Some Technology Advice To their credit, the board and CEO realized that this business model couldn’t continue forever. They acquired a small, innovative company in what they thought was an adjacent market. The acquisition turned out to be a culture clash of titanic proportions, kind of like the irresistible force meets the immovable object, as the great startup founder ran headlong into the excellent operating guy. Neither company really understood what it would take to integrate such different worldviews. (More on this in another post.)
In the middle of this acquisition, both the board (who were finance and Hollywood executives) and the CEO realized that while they were physically in Silicon Valley, they were missing someone familiar with business innovation in technology companies.
This is when I joined the board.
Distracted After a few months on the board trying to understand the difficulties of integrating the new acquisition, I realized that this was just a side-show. The real issue was that was that the instincts of the board and CEO were right. There were tectonic shifts happening outside the company – changes in markets, technology, platforms, regulations, etc -and outside their control. Worse, these shifts were outside the company’s control, because unlike the original co-founder, now gone, who managed to get their technology written into legislation, no one was working the same magic on the next generation of digital standards online or in the cloud.
We realized that the company had three to five years left before its licensing business would drop by half. As a board we slowly came to the conclusion we’d have to reinvent the company, and we didn’t have much time. The CEO agreed.
Reinvention Over the next few years, the company built an internal engineering department, and expanded its business development team in search of a new strategy and new companies to acquire.
To the outside world, things still looked great; year over year, revenue and profits were still increasing.
At each board meeting, we’d hear about new products and approve new acquisitions while we were increasingly worrying about when revenues of our core product would start declining.
The world outside the company was changing faster than we could. The new strategies and acquisitions ended up as slight variations on the ones we were already executing.
We seemed to be out of big ideas.
Time For a Change
The problem was, the company needed to think like a startup again. The current team was too focused and ironically too steeped in our current business to imagine radical reinvention.
We concluded that we needed a new CEO and new board members.
There’s nothing harder than changing strategy with a CEO who the board admires, with revenues seemingly increasing. Yet the consequences of ignoring the shifts in the market, technology and regulation is a going out of business strategy.
This was a tough call for the board as we liked the CEO, and he was the one who had asked us to join the board.
As one could imagine, the existing CEO didn’t agree. “I’ve done everything you guys have asked. Our revenue is still growing and we are acquiring all the new companies.”
While the CEO is the responsible executive for operating the company on a daily basis, ultimately it’s the responsibility of the board of the directors to hire and fire the CEO. The board is responsible to the shareholders and all the stakeholders for the ultimate survival of the company. Our call was that it was going to take a new set of eyes to get the elephant to dance.
Postscript
The new CEO turned the company on its head, divested most of the acquisitions, made other acquisitions worth billions of dollars, refocused the company, changed out most of the board and senior management.
And he even renamed the company.
Revenue doubled in the last 3 years and the market cap is approaching $4 billion as he reinvented the company.
A tough call but the right one for the shareholders.
Lessons Learned
Just because a company is profitable doesn’t mean its core businesses isn’t crumbling under its feet.
Big companies are dead long before they close the doors.
Ultimately it’s because the board of directors doesn’t act in time.
The dilemma is how to make sure that the board is not just a cheerleader for the CEO when the CEO is the primary recruiter for the board.
Microsoft fits this description. Their failures in multiple markets is no longer just a failure of management but a failure of board governance. (Hard to fix when the major shareholder is the lifelong friend of his handpicked replacement.)
It’s not the strongest of the species that survive, nor the most intelligent, but the one that is most responsive to change. Charles Darwin
Companies have a fairly predictable life cycle. They start with an innovation, search for a repeatable business model, build the infrastructure for a company, then grow by efficiently executing the model.
Over time, innovations outside the company (demographic, cultural, new technologies, etc.) outpace an existing company’s business model. The company loses customers, then revenues and profits decline and it eventually gets acquired or goes out of business. (Looking at the Dow-Jones component companies over time is a graphic example of this.)
Creative Destruction If you’re an entrepreneur, you spend your time worrying about how to get out of the box on the left and move to the right. You want to start executing the business model.
Ironically, the best CEO’s in the box on the right are constantly worrying not onlyhow to execute but also how to remain innovative and entrepreneurial.
Innovation and Entrepreneurship in the Enterprise How large companies can stay innovative and entrepreneurial has been the Holy Grail for authors of business books, business schools, consulting firms, etc. There’s some great work from lots of authors in this area. (A short list at the end of this post.)
Over 15 years ago, Clayton Christensen observed that there are two types of innovative strategies for a large company – sustaining and disruptive innovation. He believed that large companies handle sustaining innovation – evolutionary changes in their markets, products, etc. valued by their existing customers – fairly well. But most large companies find it hard to deal with disruptive innovation – radical shifts in technology, customers, regulatory changes, etc, that create new markets.
Sustaining Innovation and Entrepreneurship in the Enterprise If we use our “startup to large company,” diagram, we can see that sustaining innovations occur within a large company’s existing management structures. I’ll offer that the diagram looks something like this.
Disruptive Innovation and Entrepreneurship in the Enterprise Yet most research has shown that disruptive innovation, that is innovations that go after new markets, new customers, new technologies, etc. are best built outside a large company’s existing organization.
This type of organization is best for finding new niches in existing markets or creating entirely new markets. Why? Disruptive innovation in a large company is attempting to solve two simultaneous unknowns: the customer/market is unknown, and the product feature set is unknown. Just like a startup.
The diagram for managing disruptive innovation in large company looks suspiciously like starting from square one as a startup.
What’s Missing in Innovation and Entrepreneurship in the Enterprise? After growing past their scrappy startup roots, large companies trying to master disruptive innovation face the ultimate irony; “the Innovator’s DNA” that’s needed has more than likely been purged from the organization. Mastering disruptive innovation in a large company requires:
- different people
- different processes
In fact the people a large firm needs for this kind of innovation looks suspiciously like startup founders and the processes needed look like Customer Development.
Innovation in large company’s come in two forms; sustaining and disruptive
Disruptive innovation in a large company may require processes and individuals that look a lot like those in a startup.
Customer and Agile Development may be the methodologies that large companies need to build innovative new products
Further Reading: Harvard Business Review Articles - Meeting the Challenge of Disruptive Change, Clayton Christensen/Michael Overdorf: March/April 2000
- The Quest for Resilience, Gary Hamel/Liisa Valikangas: Sept 2003
- The Ambidextrous Organization, Charles O’Reilly/Michael Tushman: April 2004
- Darwin and the Demon: Innovating Within Established Enterprises, Geoffrey Moore: July/August 2004
- Meeting the Challenge of Corporate Entrepreneurship, David Garvin/Lynne Levesque: Oct 2006
- The Innovators DNA, Jeffrey Dyer, Hal Gregersen, Clayton Christensen: Dec 2009
Books
- Innovators Dilemma & Innovator Solution, Clayton Christensen
- Winning Through Innovation: a Practical Guide to Leading Organizational Change and Renewal, Charles O’Reilly
Startups need to have a great lawyer, accountant, patent attorney, etc. But founders need to know how to ask for their advice and when to ignore it.
Why Entrepreneurs Hate Lawyers I was having coffee with a friend who teaches at the U.C. Berkeley Boalt Law School and runs their entrepreneurship program. Our conversation led us to Scott Walkers post Why Entrepreneurs Hate Lawyers and why we both recommend that entrepreneurs print it out and tape it to their wall.
I remember when I encountered bullet #1 on Walkers list.
You Can’t Sign This Deal After being in business for all of seven months, one of our first deals at Epiphany was with a software company called Visio, (now owned by Microsoft.) After some heroics from our CTO in extracting data from SAP, the Visio CFO loved our product, thought we could save them a ton of time and money and wanted it installed ASAP. We were excited that we were getting our first six-figure check and a reference customer. Then Visio gave us their boilerplate contract.
We passed it to our law firm who promptly threw up all over it.
“You guys can’t sign this. It has you putting your software in escrow, giving them all of your source code if you go out of business, indemnifying them from all possible lawsuits, not selling to competitors, first rights on a number of irrelevant issues and has a clause about promising them your first-born children.” I stopped listening for a while as it dawned on me that the deal I thought we had was probably now gone. I was feeling pretty deflated. I tuned back in when our lawyer said, “Let us start negotiating better terms with Visio’s company counsel.”
When I was a younger entrepreneur my answer would have been, “Ok. See if you can get us better terms. Call me when you’re done.” This time I said, “Make a list of the issues in bullet form, send them to me and I’ll get back to you.”
Strategy Questions Not Legal Questions The issues our lawyer had raised about the contract, while correct, were strategy questions the founders needed to answer, not legal questions. Negotiating deal points before we thought through our strategy at best would have cost us a ton of money with little progress.
Looking at the Visio contract the question we were faced with was; how bad would the short term consequences be in signing the deal? The answer to that was easy – none. We’d have money in the bank and a reference customer.
The next question was, how bad would the deal points Visio was asking for screw us in the long term? This was more complex. Some of them would have limited our ability to sell to other software companies. Those were clearly unacceptable. Some of their other requests were just “comfort” issues like putting the software in escrow to protect Visio in case our startup went out of business.
Finally, there was a class of what I call “business development contract terms.” This happens in every company when a contract is passed around for review and everyone feels they have to mark it up with extraneous demands to feel like they had their say. Most of these points might have sounded great in law school but were impossible for a startup to deliver.
So we had to decide what deal points we could live with that wouldn’t kill our company. For example, I could agree to put our software in escrow if Visio would pay for all the legal and logistical expenses (knowing full well it was a “see, we’re doing our job” issue the Visio lawyers were insisting on, but one that Visio would never implement.) Other deal points, which my lawyers said were fatal, were also easy to agree to – don’t sell to competitors? We could easily agree to a 90-day non-compete as a sign of good faith (what Visio didn’t know is that we had no bandwidth to take on another customer while we were getting their software installed.)
My co-founder and a few board members brainstormed to make sure we weren’t missing anything. Then we got on the phone.
Why Lawyers Don’t Run Startups We realized that our goal 1) was to get a deal done, 2) on terms we could live with and 3) it required talking to someone senior at Visio with the authority to make decisions on their side. Only then could we have our lawyer spend any time on the contract.
We called the Visio CFO.
We explained that their boilerplate contract was something we couldn’t sign because it would put us out of business. We said we would be happy to work with him in providing assurances on issues that were of importance to him and his company.
We suggested that we see if we could agree to them in this call. But we wondered if he had the flexibility (meaning the authority) to overrule his lawyer on their standard contract? (It now became a matter of pride that he could.) We said that if we agreed on the big issues we could send the deal back to our lawyers. (He was surprised to hear about half of the things in his own contract. “It says what?!”)
We agreed to the major points in a half hour. The lawyers had the final contract done in two days.
Lessons Learned
Lawyers provide a service; they are not running your company.
If you find a lawyer who talks about solutions not problems, hold on to them.
In every company that gives you a contract there’s someone who wants a deal. When you run into contract issues, call them first for advice.
Recognize whether you have a legal problem or strategy problem.
The web has great blogs by lawyers who get it. Read them.
I pulled a few pranks in the military, but the one that got pulled on me took years off of my life.
Alone in the Cockpit There isn’t anything cooler for a 19-year old then getting into the cockpit of a fighter plane. While most of my time was spent in the shop repairing electronic warfare receivers, every once in awhile I got called out to the flightline to troubleshoot a problem that couldn’t be duplicated on the bench. In the year and a half I was in Thailand I climbed in and out of the cockpits of F-4’s, F-105 Wild Weasels and A-7’s.
If you worked during the day, the flightline felt like organized chaos and viewed from above it might have looked like an anthill (if it had 500lb bombs.) Planes were prepped for maintenance and had all the service equipment you needed and a crew chief nearby. But at night the flightline had a different, slower tempo. You’d catch a ride to the revetment, and you’d be out there alone watching the moths and baht bugs dance in out of the beams of the portable light carts. You’d have a “start cart” towed to the plane, lug a power cord the size of a fire hose and plug in the external power to the plane, climb the ladder, open the canopy, and get into the cockpit, turn on the aircraft circuit breakers and power up my electronic countermeasures equipment (no I never got to start the engines.) It was way cool. Even more so at night when the cockpit lighting and displays and the stars above made you realize that even a delivery vehicle of death could be beautiful.
It made you forget you were sitting on top of a rocket two inches from your rear end.
Ejection Seats All military fighter and bomber aircraft are equipped with ejection seats. If the plane is damaged in combat the pilot (and crew) can escape before the plane crashes. To eject the pilot pulls a handle and the next thing he knows he’s hopefully seeing his chute above him and damaged plane spiraling into the ground. Ejection seats work on a simple principle. Underneath each of the seat(s) is a rocket designed to shoot the crewmember out of the damaged plane. The seat is mounted on rails that guide the seat out of the plane. After clearing the plane the seat then falls away and a parachute deploys to gently land the crewmember/pilot.
Each type of military plane has a slightly different ejection sequence. On fighter planes they work by blowing the cockpit canopy off and then firing the rocket under the seat. On bombers they worked by blowing hatches off and then firing the crew up, or in some cases down, away from the aircraft.
The last thing you want is a seat going off by accident when some maintenance guy sticks his hands to rummage under the ejection seat when he dropped his screwdriver. (Something I did many times.)
When the airplane is parked the crew chief inserts safety pins to “safe” the seat. These pins stop the mechanical systems used to fire the seat. The pins had long red streamers attached to them that said “Remove before flight.”
Into the Hanger Ceiling Each time you got to an airbase you’d get briefed on aircraft safety on the “egress” systems. Someone in your shop would take you out to an aircraft and show you where each of the pins were supposed to go and make sure you knew what not to touch, kick or remove.
The accidents that happened when something did go wrong were gruesome. When I got to my first airbase in Florida they first thing they told me was, “You might want to pay attention, we scraped some airman off the hanger ceiling three months ago.” And a few months later at my base in Thailand the same thing happened again.
B-52 Egress Training When I came home from Thailand I was stationed on a B-52 bomber base. These 8-engine bombers carried nuclear weapons and had a crew of six in a two-story cockpit. On the upper deck the pilot and co-pilot faced forward, and right behind them sat the Electronic Warfare Officer and the Tail Gunner facing backwards. All four crewmembers had upward firing ejection seats just like the fighter planes I had worked on.
But on the bottom deck sat the Navigator and the Radar Navigator (the bombardier) and their seats ejected downwards.
Two of my new shop mates took me out to my first B-52 to get me “checked out.” You entered the plane from a hatch in the bottom deck and climbed a ladder to the top deck. We started on each of the four seats on top as they taught me where all the safety pins went.
As they showed me around the cockpit they kept emphasizing how much more dangerous the B-52 ejection systems were than those I was used to on fighters. “These are really old planes and these ejection systems are really, really touchy.” By the time we got to the bottom deck, I was gaining a real respect for these seats. “Oh, these seats down here? If they ever went off you’d be fired right into the ground and then burned to death by the rocket.”
Panic They sat me in the Navigators seat as they kept telling me more and more horrific B-52 ejection seat stories. “Yeah on these seats the ejection sequence automatically starts when it grabs your legs. The rocket fires in 10 seconds.” Sitting in the navigators seat, I was processing that when they said, “Move your legs back to get some more room.” I kicked my legs back and then heard a loud metallic noise.
All of a sudden my legs couldn’t move. Something had grabbed my ankles.
My shop mates looked at me and yelled, “Holly sxxt! He’s initiated the ejection system! The rocket is going to fire!! Lets get out of here!”
I looked in horror as they jumped out of the hatch and left me alone to die. I struggled to find a way to get out of the seat. Through the open hatch I could hear my shop mates counting down waiting for the seat to fire. 10, 9, 8, 7, 6, 5, 4, 3, 2, 1
I closed my eyes and prepared to die.
Pranked Time passed. I was still alive. I could hear laughter coming from the hatch as my shop mates came back up and unlocked the leg restraints. (They were just mechanical devices that didn’t arm the ejection system.)
As they helped me down out of the hatch there must have been 10 more of my shop mates gathered on the tarmac.
“Hey, he didn’t even wet his pants.”
I had just been initiated as a maintenance technician on the B-52.
At timesVC’s forget who their business is built on.
Nice Car Last week in a car showroom of all places I ran into a VC who I hadn’t seen in ten years. He had sat on the board of my last company and we chatted and made small talk as he was admiring a new car.
It was clear that he had no memory of a phone conversation my partner and I have never forgotten.
Big Name CEO It was the Internet bubble and after almost three years our startup had found a business model and we were scaling revenue and headcount fast. Our second round of funding was from a firm and VC whose names were household words. This partner lived up to his reputation and helped us hire an experienced, world-class CEO from a large consulting company that we thought would be the guy to take our company to a billion dollars (think Internet-bubble Kool-aid.)
The legendary VC was too busy to sit on our board, so we got another younger partner in his firm with seemingly the right pedigree – engineering degree, MBA, lots of boards, etc. But as we would find out the hard way – zero experience as an entrepreneur.
Now that the big name CEO had tentatively accepted our job offer we were having a board meeting via conference call to approve his compensation package. My co-founder and I gulped as we went through each part of the package; the equity we were offering would make him an equal founder, and his salary, while a huge cut for him was a lot more than the starvation budget we had put ourselves on. However, the new CEO was as hungry to join a hot Internet startup and work with legendary VC and not miss the bubble, as we were in hiring him. We thought he’d be worth it. A point the young VC on our board kept reminding us of.
You’re Just the Founders
When the call was almost over my partner and I mentioned, “We want to remind you guys that we’ve been working at founders pay for almost three years. We’d like to adjust our salaries to reflect the new pay scale.” We had hoped for parity with the new CEO, but any offer of some kind of raise would have made us feel good. Instead, what we got from the VC, was “Who the hell do you think you guys are. You’re just the founders.” Then he proceeded to give us a lecture of why we should consider ourselves lucky to get this new guy, he and his firm were the ones that were going to do the heavy lifting and we should be happy that we were going to make our money on the stock, etc.
Never Forget We never did get a raise. Luckily the company did go public, but I’ve never forgot the conversation.
For the last 12 years as friends and then students have asked me about how to approach this big name venture firm, I’ve managed to steer them to other venture firms in the valley – by suggesting that there were firms who would treat them like they mattered. I’ve averaged about 6 referrals a year.
I figure when I get to 100 I’m even.
Lessons Learned
“Founder-friendly VCs” do exist.
Having a VC who has been an entrepreneur is a plus, but it’s attitude that matters.
If you’re a founder, ask for a pay-parity agreement with a new CEO upfront and in writing.
At best I think business plan competitions are a waste of time. But until now I haven’t been able to articulate a framework of why or had a concrete suggestion of what to replace them with.
Now I do.
Business Plan Versus Business Models Where did the idea that startups write business plans come from? A business plan is the execution document that large companies write when planning product-line extensions where customer, market and product features are known. The plan describes the execution strategy for addressing these “knowns.” In the early days of venture capital, investors and entrepreneurs were familiar with the format of business plans from large company and adopted it for startups. Without much thought it has been used ever since.
It turns out that’s a mistake. A startup is not executing a series of knowns. Most startups are facing unknown customer needs, an unknown product feature set and is an organization formed to search for a repeatable and scalable business model. That means that writing a static business plan adds no value to starting a company, as the plan does not represent the iterative nature of the search for the model. A simple way to think about it is that in a startup no business plan survives first contact with customers.
Business models are dynamic and reflect the iterative reality that startups face. Business models allow agile and opportunistic founders to keep score of the Pivots in their search for a repeatable business model.
Business Plan Competitions are Great for Schools and Bad For Students Almost every university, region and car wash now has a business plan competition; the rules, who can participate, how large the prizes and who are the judges vary by school.
Business plan competitions perpetuate everything that is wrong about trying to make plans that were designed to be used in large companies fit startups. (One of my favorites: “Judging will include such factors as: Market opportunity, reward to risk, strategy, implementation plan, financing plan, etc.”) All of which may be true in large companies. But little of it is relevant to the chaos and uncertainty in the life of a startup.
Yet an ever increasing number of schools keep holding Business Plan competitions. Why?
They’re a match for the “How to write a business plan” classes that are offered.
It makes the school appear relevant to their constituencies; students, donors, faculty, VC’s.
Business plans are easy to grade, score and judge.
Schools can get Venture Firms to fund prizes for the best business plan.
Venture Firms use the contests as another source of deal flow and talent.
There is no alternative.
The irony is that business plan competitions ought to be held for plans from large companies not for startups.
The Alternative – Business Model Competitions I’ll offer that to be useful for startups Business Plan competitions need to turn into Business Model competitions. A Business Model competition has a radically different goal than writing a business plan. The Business Model competition measures how well students learn how to Pivot by getting outside the building (not by writing a plan inside one.)
Each team would be judged by their business model presentation on these five steps.
What did you initially think your initial business model was? (initial business model hypotheses)
What did you build/do? (built first product, talked to users, etc.)
What did you learn outside the building? (parts of our feature set/business model were wrong)
Then what did you do? (iterated product, changed business model, etc.)
Repeat steps 1-4
The business model would be scored and judged based on steps 3 and 4. And extra credit for multiple times through the loop.
For the first time we’d have a competition that closely resembled the reality that founders face, rather than a creative writing exercise.
Consultants can help startups leverage their limited resources. But startups can shoot themselves in the foot when founders use consultants at the wrong time or in the wrong way. Here’s why.
Your Process Doesn’t Work A friend of mine asked me to chat with a startup he’d invested in. “They’re deep into Customer Development,” he said. I waited for the shoe to drop – and it did, as he continued carefully, “But they don’t seem to be making much progress. I think your process doesn’t work.”
So I met the entrepreneur and asked him how his search for a business model was going. “Great, but we’re having a bit of a problem getting traction.” (Anytime I hear an entrepreneur talking in euphemisms, I get nervous.) After a bit more discussion, I discovered the “problem in getting traction” meant revenue was zero.
“We’re in Customer Validation but we can’t seem to close a deal.” Hmm, I asked, “Can you go back to the beginning and tell me about your Customer Discovery process? What were your original hypotheses and what did you find?” I wanted to smack him when he said, “well our consultants said…”
The rest of his story was mostly a blur. Honestly I didn’t hear much detail other than a long litany of how other people who didn’t work for the company got out of the building and talked to customers. I started paying attention to the words again when he concluded with, “I just don’t know what we’re doing wrong?”
You Can’t Outsource Personal Experience Here’s what I told him:
Customer Development is the process of how you get out of the building and search for the model. Customer Development is designed so that you the founder(s) gather first hand experience about customer and market needs.
It can’t be delegated.
Let me say it again: Getting customer feedback can not be delegated.
Why? Founders get out of the building (physically or virtually) to test their hypotheses against reality. There are times when customers are going to tell you something that you don’t want to hear. Or you’re going to hear something completely unexpected or orthogonal to what you expected.
Consultants Don’t Pivot, Founders Do It’s hearing this first-hand data that makes a founder decide to Pivot (the process of iteration in search of the successful business model.)
Pivots need to happen quickly, rapidly and often. Consultants can not do that for you. In fact, startups that use consultants almost never pivot fast enough. Why? Because it’s easy to ignore what consultants say and remain deluded by your own passion. Couple that with consultants that can’t and don’t understand the business deeply enough to know when to pivot. You have the vision, they don’t.
The breakthroughs and aha moments can be random, unpredictable—but only the founders can find and make them.
Coming out of my daze, I asked: “Why weren’t you the one talking to customers?” The answer, “Well I was too busy coding and building the product. But I knew getting customer input was important so I hired this great consultant who told me all about the features customers need.“ Ouch.
Using consultants as your proxy when you were supposed to be out there learning means you’re not really doing Customer Development and don’t understand the process.
When Do I Use a Consultant? So should your startup ever use a consultant? Of course.
Consultants can add tremendous value to your start up once you believe you have found a scalable business model – i.e. you think you have product/market fit.
Sean Ellis, a consultant who works with early stage companies, believes that “the cost of a consultant’s time can never be justified working with startups pre product/market fit – the failure rate is just too high.”
Sean believes that, “Consultants can improve the growth trajectory after your first business model is found. (In reality, once you think you found the right model, most startups will go through multiple iterations on optimizing revenue and their business model.) This help in finding the optimal model, (which can easily result in millions of dollars in incremental valuation) is where a consultant can help. At that point it is easy to find a win/win on the cost of the consultant’s time.”
I couldn’t agree more.
Lessons Learned
No consultants as you search for your business model
Get all the help you need after you found a repeatable model
If your too busy coding to get out of the building yourself find a co-founder.
I usually hear the “Should I get my MBA?” question at least once a month.
If you’re an entrepreneur, the glib answer is “no.” It’s also the wrong answer.
Should I Get My MBA? Last week I was having coffee with an ex engineering student of mine now on his second startup (and for a change it wasn’t a Web 2.0 startup) who wanted to chat about career choices. “I’m thinking of going back to school to get my MBA.” It was said less as a clear declaration than a question. It was six years since he had left school and three and a half years ago he had joined an 8-person startup as a product manager. The company was now 4-years old and 70+ people, profitable and growing fast.
I didn’t say anything as he continued, “I’m now director of product management, but I think I’m missing stuff I ought to know; finance, marketing, and operations management. We’re starting to hire senior execs as VP’s and all the jobs specs have “MBA” as a requirement. What should I do?’
The easy answer would have been, “Yes, go back and get an MBA. You fit the perfect profile; you have an engineering background, work experience in two startups and you’ll be limited in your career growth without one.” But the answer I gave him was a bit different.
Where Do You Fit? In between the coffee and breakfast I drew this diagram:
I explained that as startups grow, they go from the box on the left to the box on the right and the skills people need at each step of a company’s growth evolve and change. The skills required when they were an 8-person startup trying to “search for the business model” wasn’t the same set of skills needed now that they were a 70-person company “executing the business model.” I offered that it sounded to me as if his company was going through the transition (the box in the middle) where it was starting to put in place the processes needed to build and execute the business model.
Who Are You? I suggested that perhaps his first question shouldn’t be whether he needed an MBA. Rather the question he should be thinking of was: in which part of a company’s lifecycle did he think he wanted to spend the rest of his career? Did he enjoy the early chaotic stage of the startup? Was he fondly telling stories of how much better it was when the company was smaller? After the rocketship ride of this successful startup, did he now want to be a founder of his own startup?
Or was he more comfortable now that there was more structure, repeatability and he was managing a staff? Was his goal to be a large company executive managing large groups of people? And if a larger company was his destination, did he want to manage complex technology projects or did he see himself in more general management in sales, marketing or finance?
His vision about the trajectory of his career would answer what type of education he should get – and where he might get it.
MBA or EngineeringManagement? I pointed out that if he wanted to work in a larger company he actually had two choices – go to business school for an MBA degree or go back to a graduate school of engineering for a Engineering Management degree. (I find a disconcerting number of my MBA students with engineering backgrounds realized too late that they ought to have been in an engineering management program. They had picked the MBA route because it was trendy or they hadn’t thought through that managing engineering projects was what really excited them.)
Why Yes I Am an Entrepreneur I could see I was having an effect when he blurted out, “You know my happiest times in these startups were when we were a small team figuring out the business model. The chaos and camaraderie gave me an adrenalin rush and incredible satisfaction. While I’m really good at managing the process, this phase of the company feels like a job. I’ve been bouncing some ideas about a company with some fellow employees who feel the same way. Maybe I do want to do startups as a career.”
Then he asked me the real hard question. “So what type of graduate school do I go to get the skills to be a great entrepreneur?”
Entrepreneurial Apprenticeship I congratulated him. “You already have started your apprenticeship. You have two startups under your belt as one of the first 10 employees. If you decide that you want to be a founder of a startup you’ve made a good start.” “But where do I learn all the things a founder needs to know, not just an early employee? Team building? Creativity and innovation? Entrepreneurial finance? Agile Development? This Lean startup stuff? Where’s the school for that?”
I said, “Welcome to the wondeful world of entreprenurial education. It’s everywhere and nowhere.”
E-School versus B-School Almost all business schools now have entrepreneurship programs or departments. (At U.C. Berkeley that’s exactly the program I teach in.) But you can also find entrepreneurship programs in most engineering schools. (At Stanford that’s the program I teach in as well.)
And startup “accelerators” like Y-Combinator, Techstars, etc. also offer a crash course in Darwinian education. I also pointed out, “If your passion is starting your own company, learning by doing is an equally viable choice.”
MBA? Engineering Management program? Startup accelerators? Just do it? He had more choices than most. But first…
Who was he?
And who did he want to be?
Lessons Learned
Where do you want to work: startups, mid-size or large companies?
If large companies, what do you want do: engineering management or corporate management?
If you find yourself debating the “startup versus large company” choice you’ve already chosen the big company. Entrepreneurship isn’t a career choice it’s a passion and obsession.
As an entrepreneur one of the most satisfying feelings was having an idea that few thought was rational, viable, or the common wisdom and building it into a profitable company.
Though it’s over a decade since I’ve done a startup, I had that feeling again over the last few weeks.
You Actually Did This? When I wrote the Four Steps to the Epiphany and invented the Customer Development process, my goal was to simply explain to myself what was broken in building a startup and propose an alternative path.
The last few weeks have seen a flurry of Lean Startup conferences and presentations from companies actually using Customer Development to find a business model. It’s no longer a theory. And I found myself having the same kind of satisfied (and surprised) reaction.
Five Time Pivot Champ – Xobni
I learned something from all the companies that presented, but the one that made me smile the most was Xobni. Here were two 20-something founders with $12K in the bank who out of necessity became a Lean Startup and used customer and agile development. It’s not clear that if they had initially raised millions of dollars that they would have had a better result.
Take a look at their presentation and see how they got to 5 million users.
Continuous Learning – Dropbox
The Dropbox team also had a great story about pivoting and customer development.
One of their slides said it best, “Learn Early, Learn Often.”
Watch the video of the Dropbox talk.
Lessons Learned
Most startup business models are initially wrong.
The process of iteration in search of the successful business model is called the Pivot.
Learn early, learn often.
The speed at which you Pivot is inversely proportional to the amount of cash in your bank.
I’ve been teaching Customer Development at U.C. Berkeley’s Haas Business School since the fall of 2004 and in a joint MBA with Columbia since 2005. This Tuesday I finished the lectures for this semester and my students are now working hard on their final project.
A lot has happened since I first authored and taught the class.
Four Steps Back in 2004, Jerry Engel the head of the Entreprenuership program at Haas Business School at U.C. Berkeley was brave enough to let me write and teach a class on a subject that no one had ever heard of – Customer Development. The previous two years at Haas I had guest taught and then co-taught an entreprenuership course, but this would be my first time going it alone.
The rubble was still bouncing from the dot-com collapse and my goal was to teach students that there might be another way to think about how to build a startup. Customer Development was a process to quickly search for a profitable business model when customer needs (features, pricing, channel, etc.) are unknown. My intent at the time (as it is now) was not to offer Customer Development as the way but another way.
The class essentially followed the text I wrote, The Four Steps to the Epiphany. The class met once a week for three hours. The syllabus was what you would expect; the first week of class was an introduction, and then subsequent weeks covered Market Type, Product versus Customer Development, and then two weeks on each of the four steps.
There Are No Cases Since this was Business School part of the teaching was with the case-method (students read a story, “the case,” about a real-world business problem. The cases are designed to have insufficient or confusing information and usually end with a dilemma. Students have to analyze the case, discuss it in the class and propose possible solutions.) This is a lot more fun then just hearing me drone on for three hours.
The problem was that Harvard Business School who writes most of the cases used in Business Schools worldwide, had never heard of Customer Development. (Tom Eisenmann at HBS is now fixing that.) But at the time this meant that there were no cases written for any of the four steps in Customer Development. So I read through the HBS web site and picked 10 cases that were such egregious failures they unintentionally illustrated why a lack of Customer Discovery or Validation could sink a company. A few cases, like Motive, IMVU (written by Stanford,) Documentum and Priceline were examples of companies done right. Each semester I rotated through the cases and taught 6 or 7 of them.
Is Mike Maples An Idiot? To supplement the lectures and cases I brought in a series of guests that could help illustrate some of the points I was making in each of the four steps of Customer Development. My favorite case was about a company called Motive. In it the VP of Business Development is in Customer Validation and faced with the dilemma of whether he should give away his product in beta test or charge for it. The case says he decides to charge $50,000 for his beta software and is now worrying whether anyone will buy it. After discussing the case and its relevance to Customer Validation I’d ask the class, “How many of you think that Mike Maples the VP of Business Development of Motive is a genius?” I get a show of hands “Tell me why you think he’s so smart?” I’d ask. “How many of you think he’s an idiot?” Another show of hands. (The class usually split 50/50.) ”If you think he’s an idiot what would you tell him?” I innocently asked. The responses usually got explicit and colorful.
I then point to the back of the room and announce, “Mike, why don’t you come up here and tell us why you weren’t an idiot.” Mike Maples, the subject of the case, had been sitting in the back of the classroom. (Mike is now a partner in the super-angel firm Floodgate.) The class would roar. No matter how many years Mike and I did this it still surprised every class.
Exercises and Assignments After each of the four steps students had a one-page assignment – they needed to get out of the building and analyze a company to see whether it had engaged in that step of Customer Development. How did it affect their success or failure? What were some of the key things they learned/should have learned?
For the final project, students formed 5-person teams, got out of the building and analyzed a company’s progress through all four steps of Customer Development.
It’s Getting Stale
While the Customer Development class was cutting edge theory in 2004, by 2009 the class was getting stale. Ironically it was because one of my students, Eric Ries who solved the problem of how engineering would actually build products in companies with a Customer Development process.
Customer Development was a way to quickly search outside the building for a profitable business model when customer needs are unknown. Eric observed that an Agile Development model was the right match for engineering to build a product when the initial feature set was unknown. The sum of solving for both unknown customer needs and unknown features became the Lean Startup.
Topological Homeomorphism This year I decided the Customer Development class needed to morph into the Lean Startup class. We needed to teach both Customer Development and Agile methodologies. I drafted Eric to help teach the class and we began to transform the curriculum.
Guests Who’ve Done It Six years ago when students would ask, “So Professor Blank which companies are actually doing Customer Development?” The best I could do was wave my hands and say it’s a good academic theory and some day lots of startups will be doing it. Fast forward to this year and Eric brought in a stream of companies doing all or part of Customer and Agile Development.
We had so many guests this semester that most of the cases I normally teach got preempted by these real-world examples.
What’s Next This was a transition year for the curriculum. The guests were great but they were all web 2.0 examples. I need some enterprise software and hardware company cases. The lecture material is still heavily Customer Development. I’m going to have to work hard and extract the specifics of how engineering does continuous learning and deployment and teach it in sync with each step of Customer Development. The Pivot’s are the core of the iterative nature of Customer and Agile Development and we need more lecture, case and guest examples.
I love this stuff.
Lessons Learned
“Innovate or Die” is as applicable for teaching entrepreneurship as it is implementing entrepreneurship
Never look back unless you’re planning to go that way.
Entrepreneurs see things before others do. They recognize patterns, form hypotheses and act long before all the data is in. Von Clausewitz described this as seeing through the “fog of war.” When their hypotheses are wrong we say they were hallucinating. When they are right we call them visionaries. (The best entrepreneurs pivot on each hallucination until they get it right – then we call them practitioners of the Lean Startup.)
There’s a growing realization that startups with market and customer risk can be built in a radically different way than have been done before – not just cheaper, or faster – but potentially with something more profound – a greater probability of success.
The 400 people who filled the conference room in San Francisco and thousands who watched it across the world shared this belief.
But what was more remarkable were the list of speakers who have embraced (all or part of ) this methodology; Kent Beck (creator of Extreme Programming and Test Driven Development), Brett Durrett of IMVU (the first Lean Implementation), Randy Komisar partner at Kleiner Perkins, Hiten Shah of KISSmetrics, Drew Houston of Dropbox, Farbood Nivi of Grockit, David Weekly of PBworks and on and on. The full list of great speakers is here and links to their presentations are here and videos of all the presentations can be found here.
Two tests for any successful conference are: a) to see how many seats are empty by the end of the day. After 8 full hours at this one there seemed to be more people in the hall at the end then when we started and b) if everyone thought they got their money’s worth. It wasn’t my show, but I think they’ll be renting a much bigger hall next year.
This was one of those events that if you weren’t there you will say you were.
Eric Ries’s Show This conference and the Lean Startup was the work of one amazing individual – Eric Ries. It was both satisfying and a bit surrealistic to sit in the back of the hall looking at the sea of heads and listening to speakers extend, embellish and expand on a topic that a scant five years ago was just my theory in my U.C. Berkeley classroom.
It wasn’t until Eric Ries sat in my class and had the insight – that to actually implement Customer Development engineers needed to couple it with an agile methodology – that the theory turned into practice. It was then that Customer Development became one of the building blocks of the Lean Startup. Eric left my classroom, and with his partner Will Harvey implemented the Lean Startup at IMVU. He since traveled the world becoming the Johnny Appleseed of the Lean Startup principles.
Thanks Eric.
Why Accountants Don’t Run Startups
If you wanted to know what I’ve been thinking about after Customer Development, you can see and hear it in the talk I gave at the conference. Watch the expanded version of “Why Accountants Don’t Run Startups below.
The first story, Shifts in Entrepreneurship starts at 4:20
I was catching up over coffee and a muffin with a student I hadn’t seen for years who’s now CEO of his own struggling startup. As I listened to him present the problems of matching lithium-ion battery packs to EV powertrains and direct drive motors, I realized that he had a built a product for a segment of the electric vehicle market that possibly could put his company on the right side of a major industry discontinuity.
But he was explaining it like it was his PhD dissertation defense.
Our product is really complicated After hearing more details about the features of the product (I think he was heading to the level of Quantum electrodynamics) I asked if he could explain to me why I should care. His response was to describe even more features. When I called for a time-out the reaction was one I hear a lot. “Our product is really complicated I need to tell you all about it so you get it.”
I told him I disagreed and pointed out that anyone can make a complicated idea sound complicated. The art is making it sound simple, compelling and inevitable.
Turning on your Reality Distortion Field The ability to deliver a persuasive elevator pitch and follow it up with a substantive presentation is the difference between a funded entrepreneur and those having coffee complaining that they’re out of cash. It’s a litmus test of how you will behave in front of customers, employees and investors.
30-seconds The common wisdom is that you need to be able to describe your product/company in 30-seconds. The 30 second elevator pitch is such a common euphemism that people forget its not about the time, it’s about the impact and the objective. The goal is not to pack in every technical detail about the product. You don’t even need to mention the product. The objective is to get the listener to stop whatever they had planned to do next and instead say, “Tell me more.”
How do you put together a 30-second pitch?
Envision how the world will be different five years after people started using your product. Tell me. Explain to me why it’s a logical conclusion. Quickly show me that it’s possible. And do this in less than 100 words.
The CEOs reaction over his half- finished muffin was, “An elevator pitch is hype. I’m not a sales guy I’m an engineer.”
The reality is that if you are going to be a founding CEO, investors want to understand that you have a vision big enough to address a major opportunity and an investment. Potential employees need to understand your vision of the future to decide whether against all other choices they will join you. Customers need to stop being satisfied with the status quo and queue up for whatever you are going to deliver. Your elevator pitch is a proxy for all of these things.
While my ex student had been describing the detailed architecture of middleware of electric vehicles I realized what I wanted to understand was how this company was going to change the world.
All he had to say was, “The electric vehicle business is like the automobile business in 1898. We’re on the cusp of a major transformation. If you believe electric vehicles are going to have a significant share of the truck business in 10 years, we are going to be on the right side of the fault zone. The heart of these vehicles will be a powertrain controller and propulsion system. We’ve designed, built and installed them. Every electric truck will have to have a product like ours.”
75 words.
That would have been enough to have me say, “Tell me more.”
Lessons Learned
Complex products need a simple summary
Tell me why I should quit my job to join you
Tell me why I should invest in you rather than the line outside my door
Tell me why I should buy from you rather than the existing suppliers
One of the best ways to get a debate going into the entrepreneurial world is to throw the “Nature versus Nurture” hand-grenade into a conversation. The question is whether you are born with innate entrepreneurial talent or whether you can be taught to operate like an entrepreneur.
Taking Sides Fred Wilson of Union Square Ventures, Jason Calacanis, founder of Mahalo.com, and Mark Suster of GRP Partners, have all weighed in on the nature side – you’re born being an entrepreneur or you’re not.
The Debate This Tuesday, April 20th Stanford’s Business Association of Stanford Entrepreneurial Students will be sponsoring a panel discussion on Nature Versus Nurture and Entrepreneurship. Mark Suster, Vivek Wadhwa and Patrick Chung, Partner at New Enterprises Associates will be debating. I’ll be the moderator (referee).
Since I get to ask questions but not talk, I’ll weigh in with my two cents here.
What’s An Entrepreneur? Most of the nature versus nurture conversations start by defining the characteristics of an entrepreneur: risk taking, tenacity, resilience, confidence, competiveness, belief in ones self, ability to construct a vision, reality distortion field, etc. The conversation then goes into making the case whether these can be taught or you’re born with them.
It’s Nature – My DNA is Much Better Than Yours The “it’s all about nature” point of view is pretty simple. You got the skills you were born with hardwired in your DNA.
There was a point in my life when it felt good thinking that I was born with skills that few others have. Heck, if there is one defining characteristic that all entrepreneurs do have it’s a healthy ego and the feeling that their skills are special and unique. How depressing to think that others could be trained to do what I could do.
Everything about my own career says I was born with it.
It’s Nurture – Of Course We Can Train You On the other hand, there’s something un-American to think that you cannot rise above your genes and your station in life. The idea that the U.S. is an egalitarian society based on “All men are created equal” is what makes the country a magnet for so many. The nurture camp believes that with hard work and the right education anyone can learn to be an entrepreneur.
As I got older I realized that whatever I was born with was shaped by thousands of hours of my environment – a chaotic upbringing, learning how to work in a war zone, multiple mentors throughout my career, etc.
Everything about my own career says I was nurtured by my environment.
Blind Men and an Elephant One of the common threads through the blogs on the Nature/Nurture subject is the tendency of the writers to take their personal experience and extrapolate it to others; the “I knew I was an entrepreneur since high school – therefore everyone else is” to make the nature case. Or the “My parents were in business, or I had a great set of mentors and teachers” to explain why nurture is correct.
Perhaps the Answer is Yes to Both Over the last decade I’ve taught over a 1000 students in entrepreneurial classes and a good percentage of them start companies. They’ve come from all backgrounds and walks of life, ethnicity, class, and type of schools. An interesting proportion come from dysfunctional families yet the majority had a normal upbringing. My students from foreign countries beat the long odds to make it from their distant country to my classroom, while others were born in New York and flew here first class. Some were hard-wired from an early age knowing they wanted to kill it from day one. Others saw the light first go on as PhD students as they sat in my classroom.
VC’s might fund one of these types or another (started their first company in high school, top schools versus not, men versus women, etc.) but it’s not clear that there’s any evidence other than their selection bias that one is better than the other.
Just some passionate opinions stated with certainty.
Nature Versus Nurture versus Culture? Local culture and environment is the last part of the debate that rarely gets mentioned and may be of equal importance.
Thirty plus years ago when I came to Silicon Valley Asians and Indians in high technology were a small minority, and almost none were running companies or in venture capital. Were there no Asians or Indians with entrepreneurial DNA in the U.S.? Were they not being nurtured? Or was there something about the (venture capital) culture of the valley at the time that didn’t think they could be entrepreneurial founders or investors?
Are we going to look back in 30 years and say the same about why there are so few woman entrepreneurs today?
Today Silicon Valley, New York and Boston are magnets for entrepreneurs in the U.S. But is every entrepreneur with great DNA working in these locations? Is the rest of the country truly bereft of any remaining talent? Or is it something about those locations (network effect, risk capital, nurturing network) that makes entrepreneurs in other parts of the country start small businesses or even spend their lives in a 9 to 5 job? (I’ve written and presented a bit on this subject.)
Or look at Israel. They have more public companies on the U.S. NASDAQ stock exchange than any other country. (In fact, 3 times all other countries combined.) Is it their DNA? Nurture? Or something about their local culture and environment that makes for more entrepreneurs per square mile than anywhere else? (Hint – Unit 8200 and the Talpiot program.)
This week I’m at the California Coastal Commission hearing in Ventura California wearing my other hat as a public official for the State of California. After the hearing I drove up to Santa Barbara to give a talk to a Lean Startup Meetup.
The talk, “Why Accountants Don’t Run Startups” summarized my current thinking about startups, how and why they’re different than large companies and for good measure threw in a few thoughts about entrepreneurial education.
Startups are the search to find order in chaos. Steve Blank
At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close. But I think I know how to fix it.” He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.
Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you. That’s why we invested in you.” He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”
Investors bet on a startup CEO to find the repeatable and scalable business model.
Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier. And a lot more interesting. Here’s what really happens.
Observe, Orient, Decide and Act Whether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.
Pivoting the Business Model
What happens when the startup’s leader recognizes that the original business model model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.
The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.
(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)
Types of Pivots “Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.
If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.
Operating in Chaos + Speed + Pivots = Success Unlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.) This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.
As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well-thought-out business model will quickly become irrelevant.
Summary Startups are inherently chaotic. The rapid shifts in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.
Pivot.
Lessons Learned
A startup is an organization formed to search for a repeatable and scalable business model.
Most startup business models are initially wrong.
The process of iteration in search of the successful business model is called the Pivot.
Pivots need to happen quickly, rapidly and often.
At the seed stage, microcap funds/ superangels understand that companies are still searching for a business model – they get Pivots.
Most of the time when startups go out for Series A or B round, the VC assumption is that a scalable business model has already been found.
Pivots are why startups must be agile and opportunistic and why their cultures are different from large companies.
No campaign plan survives first contact with the enemy
Field Marshall Helmuth Graf von Moltke
I was catching up with an ex-graduate student at Café Borrone, my favorite coffee place in Menlo Park. This was the second of three “office hours” I was holding that morning for ex students. He and his co-founder were both PhD’s in applied math who believe they can make some serious inroads on next generation search. Over coffee he said, “I need some cheering up. I think my startup is going to fail even before I get funded.” Now he had my attention. I thought his technology was was potentially a killer app. I put down my coffee and listened.
He said, “After we graduated we took our great idea, holed up in my apartment and spent months researching and writing a business plan. We even entered it in the business plan competition. When were done we followed your advice and got out of the building and started talking to potential users and customers.” Ok, I said, “What’s the problem?” He replied, “Well the customers are not acting like we predicted in our plan! There must be something really wrong with our business. We thought we’d take our plan and go raise seed money. We can’t raise money knowing our plan is wrong.”
I said, “Congratulations, you’re not failing, you just took a three and a half month detour.”
Here’s why.
No Plan Survives First Contact With Customers These guys had spent 4 months writing a 60-page plan with 12 pages of spreadsheets. They collected information that justified their assumptions about the problem, opportunity, market size, their solution and competitors and their team, They rolled up a 5-year sales forecast with assumptions about their revenue model, pricing, sales, marketing, customer acquisition cost, etc. Then they had a five-year P&L statement, balance sheet, cash flow and cap table. It was an exquisitely crafted plan. Finally, they took the plan and boiled it down to 15 of the prettiest slides you ever saw.
The problem was that two weeks after they got out of the building talking to potential customers and users, they realized that at least 1/2 of their key assumptions in their wonderfully well crafted plan were wrong.
Why a business plan is different than a business model As I listened, I thought about the other startup I had met an hour earlier. They also had been hard at work for the last 3½ months. But they spent their time differently. Instead of writing a full-fledged business plan, they had focused on building and testing a business model.
A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company. This includes how the product gets distributed to your customers and how money flows back into your company. And it shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business.
This team had spent their first two weeks laying out their hypotheses about sales, marketing, pricing, solution, competitors, etc. and put in their first-pass financial assumptions. It took just five PowerPoint slides to capture their assumptions and top line financials.
This team didn’t spend a lot of time justifying their assumptions because they knew facts would change their assumptions. Instead of writing a formal business plan they took their business model and got out of the building to gather feedback on their critical hypotheses (revenue model, pricing, sales, marketing, customer acquisition cost, etc.) They even mocked up their application and tested landing pages, keywords, customer acquisition cost and other critical assumptions. After three months they felt they had enough preliminary customer and user data to go back and write a PowerPoint presentation that summarized their findings.
This team had wanted to have coffee to chat about which of the four seed round offers they had received they should accept.
A plan is static, a model is dynamic Entrepreneurs treat a business plan, once written as a final collection of facts. Once completed you don’t often hear about people rewriting their plan. Instead it is treated as the culmination of everything they know and believe. It’s static.
In contrast, a business model is designed to be rapidly changed to reflect what you find outside the building in talking to customers. It’s dynamic.
“So do you mean I should never have written a business plan?” asked the founder who had spent the time crafting the perfect plan. “On the contrary,” I said. “Business plans are quite useful. The writing exercise forces you to think through all parts of your business. Putting together the financial model forces you to think about how to build a profitable business. But you just discovered that as smart as you and your team are, there were no facts inside your apartment. Unless you have tested the assumptions in your business model first, outside the building, your business plan is just creative writing.”
(Next post: Iterating the Business Model – The Pivot.)
Lessons Learned
A startup is an organization formed to search for a repeatable and scalable business model.
There are no facts inside your building, so get outside and get some.
Draw and test the Business Model first, the Business Plan then follows.
Few if any investors read your business plan to see if they’re interested in your business
The Fundamentals of Technology Entrepreneurship course at Stanford taught undergraduates how to take a technical idea and turn it into a profitable and scalable company. By getting out of the building on a team project, the class helped students viscerally understand that a startup is a search for a profitable business model. Students formed teams, came up with a business idea then talked to customers, vendors and sales channel partners to validate their business model. (And learned how to pivot their model as reality intruded.)
For undergraduates taking multiple classes finding the time to do it well was tough. But for those with full time jobs this class was a disaster.
Too Much The first time I taught the Fundamentals of Technology Entrepreneurship class, a quarter of the class were foreign students in a special engineering-entrepreneurship program where they took one entrepreneurship class each quarter at Stanford while working full time in technology startups in Silicon Valley. The Fundamentals of Technology Entrepreneurship was intended to be their introduction to entrepreneurship. However, working full time while simultaneously attempting to participate in a team based project and Customer Discovery outside the classroom just didn’t work. The foreign students felt overwhelmed and the full time Stanford students thought they weren’t carrying their weight (when in fact they were carrying much, much more.)
We quickly realized we needed a different class to introduce entrepreneurship to students who were already knee deep in working in a startup 24/7.
Design a New Class Around Entrepreneurial Guest Speakers Brainstorming with Tina Seelig we came up with the idea of a survey course – an introduction to entrepreneurship built around Stanford’s Entreprenuerial Thought Leaders speakers series which brings technology speakers to campus every week. In this survey course, the students would listen to the speakers and then attend twice-weekly classes which focused on the basic concepts of a startup (demand creation, sales, partnerships, team building, financing, etc.) We’d use the lectures and guest speakers to help students new to the field understand that a startup is simply a temporary organization to search for a repeatable and profitable business model. Then we’d have the students interact directly with entrepreneurs and industry leaders in the classroom.
The Spirit of Entrepreneurship – An Interactive Survey Class We christened the class The Spirit of Entrepreneurship. Open to all students at Stanford it was taught as two, one-hour sessions, one held the day before the guest speaker and one immediately after each guest speaker. To prepare for each speaker, we asked students to analyze the speakers company over the weekend. (For the students who were working full-time this schedule gave them the time they needed to complete their analysis.)
This new class also appealed to a wide variety of non-engineering Stanford students. In addition to the overseas work/study students I found myself teaching history majors, English majors, education majors, et al who were interested in getting their toes wet but weren’t sure they wanted to commit to the hardcore Fundamentals of Technology Entrepreneurship course.
Each week the students had to submit a two-page analysis of the presenting company’s business model, distribution channels, demand creation activities, and engineering. As some of the companies were already large, the students had to find out how the founders discovered their business model, built their team and got funded.
Since I did not select the guest speakers, the course turned into a continual improv session as I tried to match my lectures to the unpredictable variety of industries (biotech, enterprise software, video games, media, web 2.0, etc.) and different life cycle stages of the guest speakers’ companies (startup to 20+billion.)
Guest Speakers The students saw the guests speak before a live-audience of several hundred of their fellow Stanford students. (The videos of these speakers are edited, indexed and available as 1600 free videos and podcasts as part of Stanford’s E-Corner, on-line here.)
The heart of the class and its improvisational nature came when every speaker agreed to walk over to our classroom and sit and chat with our class one-on-one for an hour. I would interview them for the first 20 minutes or so and then turn the questioning over to the class. This personal first-hand interaction with entrepreneurs created lots of opportunity for insights. For example, hearing David Heinemeir Hannson of 37Signals talk about why his company will never get “big” and then have Steve Case of AOL/TimeWarner talk the next week about why his did helped students understand that there is no “right answer”. Similarly having the students question Trip Adler from Scribd one week about why posting documents on-line is the future and hearing from Rashmi Sinha and Jonathan Boutelle of Slideshare the next week remind us that it’s all about PowerPoints, vividly demonstrated that entrepreneurs can interpret the same market in very different ways.
Dinners I spent quite a few dinners with my students in this class. The Stanford students were curious whether startups were for them and we talked about whether entreprenuers are born or can be made (the nature versus nurture debate.) The overseas students were trying to make sense of Silicon Valley, its work ethic and how its entrepreneurial culture would fit back home. In Silicon Valley we take for granted that someone who failed in their previous company is considered an “experienced entrepreneur.” I was reminded that in other cultures and countries the consequences of failure are much less benign.
Lessons Learned
Entrepreneurship is an art not a science.
Entrepreneurship is driven by people as well as business models.
Entrepreneurship only thrives in a culture that does not penalize risk-taking or failure.
I thought today was an appropriate time to tell this story. I’m hoping the Statute of Limitations has run out.
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As I’ve gotten older, I realized that one of the skills I have is pattern recognition across large data sets. When I was young, I didn’t have much data. So back then I constructed “what if…” scenarios in my head to amuse myself. The first time I did this I created havoc on an Air Force base by convincing everyone that gravity would be turned off. This time what was meant as a private joke accidentally ended up involving the entire U.S. Air Force Pacific Command in the middle of the Vietnam War.
The Night Shift I was 20 years old in Thailand repairing electronic countermeasures receivers on the “graveyard” shift (midnight-to-eight in the morning.) Outside our air-conditioned shop, the nights were still warm and muggy as other maintenance technicians were also working through the night repairing all the broken parts of fighter planes; navigation, radar, jet engines, etc. The fighters would sit in their protective revetments until morning slowly being reassembled for the next days shift over North Vietnam. As the early morning sun was lighting up the flightline I could hear the rumble of the fighters taking off. I’d get off work with the sun still low in the morning sky and watch them taxi to the ready line, arm their weapons and roar down the runway.
Access Since I was responsible for my tiny part of the 150+ person shop, I had the keys to the electronic warfare administrative office. Giving a 20-year old with an active imagination and a history of large scale pranks access to an administrative office was a bad idea. The office had file cabinets with personnel records, training records, administrative records, etc. And with time on my hands I went through everybody’s files, and while there was nothing particularly interesting, it kept me busy reading for weeks.
As I looked at all these personnel records, I thought it would be funny to create an entirely new person who didn’t exist. To amuse myself, my project over the next few months would be to create all the records for this fictional persona. But what to name him? Cheech and Chong, a comedy team in the early 1970’s, had come up with a character whose name I had found laugh-out-loud funny (remember I was 20) – Ashley Roachclip.
That’s who I was going to have join the war effort – Airman Ashley P. Roachclip.
Airman Ashley P. Roachclip Reporting For Duty Each evening after I finished repairing microwave warning receivers that hopefully would allow our fighter planes to see the North Vietnamese Surface to Air Missiles before they launched, I sat and typed away. I spent weeks copying all the personnel and training forms, assembling a complete dossier for Airman Roachclip. This was my first attempt at creative writing, and I gave him a very interesting career (he was a very bad airman.) When I was done, there must have been 70 pages in Airman Ashley P. Roachclip’s personal file.
Airman Roachclip was now part of the Vietnam war effort. Feeling fulfilled, I put his records back in the files and never had a second thought.
Formation Fast forward a few months. Most of the time my only interaction with our shop’s military hierarchy was getting briefed by the swing shift which preceded me, and me briefing the day shift which followed me. We’d discuss transition issues about equipment problems or talk about parts needed to fix the remaining equipment, etc.
But one day as I came into work, the swing shift said, “There is a mandatory military formation (meeting) at 0900.” And the meeting wasn’t just for me, it was for the entire 150+ people in the shop.
At 0900 we stepped out into the bright Thai sunlight and formed up. And I realized that it’s not just our shop, but it looks like it’s most of the 500 person avionics squadron.
On the Record A few captains surrounded the assistant base commander. For an enlisted man sighting of an officer other than the flight crews was never a good sign. I managed to work my way to the back row. Stacked on a long table in front of the officers were boxes of personnel records. As we formed up, we’re all asking each other, “What’s going on?”
Finally someone calls us all to attention, and the assistant base commander announced, “We’re here today because of a personnel matter. This base submitted the total number of airmen we have to Pacific Headquarters in Hawaii. According to USAF records, 123,912 airmen were sent to Southeast Asia, but they have records showing that are 123,913 airmen here. That means there is one extra airman we can’t account for. Headquarters has traced that one extra airman in the entire Pacific theatre down to this avionics squadron.”
“When we call your name come up to the table, report in to your shop chief and pick up your personnel record. We’ll start with the radar shop,” a captain announced.
At this moment I realized the personnel record I created had somehow gotten reported as being a real member of our shop and had screwed up the system. I’m in a war zone, and I’m probably going to be shot for this.
The captain read names alphabetically through each shop. When he called out, “Airman Jones,” you went up, saluted and picked up your records. They looked at it, they looked at you, and then you were dismissed. I died a bit at each time they called a name. They called all the names in radar shop, then the nav shop and now they were down to the electronic warfare shop.
He’s A Mythical Character Sir The names became a blur, “Airman Johnson, yes, sir, Airman Potts, yes sir…” I couldn’t tell if I was sweating from standing in the Thai sunlight or out sheer terror. How did this happen? Unlike my previous prank I had no intention of this one becoming public. Now I was wondering if they’d arrest me in front of my entire shop. And I wondered what kind of prison the military had.
Finally the captain calls out, “Airman Roachclip,” … Silence. They call again, this time louder, “Airman Roachclip front and center.” People began to snicker, as they yell again, “Airman Ashley P. Roachclip front and center.” And all of a sudden all the young guys started to laugh out loud.
The assistant base commander who had been irritated at the start of this process was now really mad. He walked out from behind the table and put his face right in front of one of my shop mates who had been laughing the loudest. “What’s so funny, airman?” He shouted. The startled airmen replied, “Sir, Ashley P. Roachclip is a mythical character, sir.”
This time it was the major’s turn to be surprised, “What did you say, son?” My shop mate managed to stammer out, “Sir, Ashley Roachclip is in a Cheech and Chong album and he’s the President of the United Heads For Hemp.” The base commander started to turn red, but before he could say anything else someone else volunteered, “I have the album in my barracks, sir. I can get it for you.”
Finally the base commander asks, “Are you telling me Ashley P. Roachclip is not an airman in the United States Air Force?” The airman replied, “ Yes, sir, no he’s not, sir.”
You can just imagine the fur ball of activity this revelation created among the officers and shop chiefs. All I could think is: “Why did I do this again? It was the same chaos that happened the last time I pulled a prank in the military. I promised myself that if I somehow got out of this one without being caught, I was never going to do another practical joke again.
After 15 minutes of further discussion, (and after review of the clearly fantastic accomplishments in Airman Roachclip’s personnel record) they dismissed us. For the next three months I thought they would dust the personnel record for fingerprints, find out it was me, and send me to jail.
And then one day the air war was over the North was over. We were all going home.
Back from a family humanitarian trip/vacation to one of the last bastions of Communism where “marketing” isn’t even a profession and entrepreneurship is a crime. The irony is that the “Revolutionary Square” in all these Communist countries will be the the first place the McDonald’s go when the system collapses.
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In my last post I described my approach to one of the three classes I teach at Stanford in the engineering school: Fundamentals of Technology Entrepreneurship. The key things I want students to take from the class are:
Understand that a startup is a temporary organization designed to search for a profitable business model
Learn how to put together a business model, not a business plan
Understand that a business model is only a series of hypotheses that need to be validated outside the building
Class Logistics As described in the previous post, this is a hands-on class. The 55 students formed 11 teams, and each team had to come up with an original idea, size the opportunity, propose a Business Model, get out of the building and test their hypotheses and analyze and explain each of the parts of their model.
The class wouldn’t have been possible without lots of hands other than mine.
Teaching Team Having a teaching partner makes life a lot easier and the class improves. A partner allows me the flexibility to miss a session or two (my job as a California Coastal Commissioner meets three days every month up and down the coast of California.) But the best benefit is bringing a second set of eyeballs to the curriculum which always makes it better.
This was the year I finally got the “business model versus business plan” concept nailed down. In previous classes I had experimented with moving away from the traditional focus on writing a business plan to a hands-on approach to building a business model.
But it wasn’t until Ann Miura-Ko joined me as a teaching partner that this “teach the model not the plan” idea jelled. Ann who had been my Teaching Assistant while she had finished her PhD at Stanford felt the same frustration about teaching entrepreneurs to assemble a business plan that we knew in the real world wouldn’t survive first contact with customers. After Stanford, Ann joined Mike Maples’ Venture Capital firm Floodgate as a partner. Over the summer we had both been impressed with Alexander Osterwalder’s Business Model Template work. At first we thought of adopting his template for the class, but found that an even more simplified version of a canonical business model that Ann developed worked better.
Teaching Assistants Teaching at both Stanford and Berkeley I get to see the difference between the resources in a private university and those of a state university. (For the first 5 years at Berkeley, I taught 60 students by myself with no teaching partner or teaching assistant.) As the Stanford entrepreneurship program for the engineering school sits in the Management Science and Engineering Department, most of our TA’s are students in the MS&E PhD program. For this class Daisy Chung and David Hutton were our Teaching Assistants (TA’s.) TA’s make managing 60 students working on cases and team projects manageable. They set up and keep the class web site updated. They provide logistical support for guest speakers. They answer enumerable emails about logistics as well as substantive questions about class content. In addition to Ann and my office hours, Daisy and David held their own office hours to provide student support.
Most importantly, while Ann I reviewed all the grades, the TA’s managed the logistics of grading: grading the homework (in this class the case study summaries) and the business model written summary, keeping track of class participation and rolling up all the grades from the formal presentation. And they gave us feedback after each class session letting us know if we were particularly incoherent and kept us abreast of the usual student and team dynamics/crisis.
Finally our TA’s managed the mentors we had supporting the students.
Mentors One part of Silicon Valley culture that doesn’t get enough credit is the generosity of entrepreneurs and VC’s who are willing to share their time with students. Ann and I recruited VC’s and entrepreneurs to be mentors for each team. (We’ve never had a problem in getting help for these classes.) Typically we have a mix of new mentors and those who have volunteered their time before.) I wrote a handbook for the mentors to explain their roles (here.)
Essentially mentors support and coach each team. They typically met once or twice in person with the team, help them network outside the building, answer emails, provide critiques, etc. On average, mentors spent about 6 to 8 hours of time over the quarter with students. Some even came into to class to cheer on their team for their final business model presentations.
Guest Speakers Two important things I learned early on in teaching are: 1) regardless of how good you are, students get sick of hearing you drone on week after week, and 2) hearing a guest make a point you’ve been trying to get across often makes it stick. So we tried to break up our lectures with guest speakers.
Ideally we attempt to match the guests with the case or class session subject. For example, when we taught the value of getting out of the building and agile development, we had Eric Ries talk about the Lean Startup. When we covered partnerships with the WebTV case, we had Spencer Tall who negotiated the deal with Sony for WebTV come in and explain to the class what really happened. (Ann also kept me in the 21st century by making sure we had several woman entrepreneurs as guest speakers.)
Results In the last decade, entrepreneurship has become faddish, particularly in college. It’s now “cool” to be an entrepreneur, and every school wants some type of entrepreneurship course. While that’s gratifying, the fact is that most people are ill suited to survive in the wild as founders or early employees.
I taught this introductory undergraduate class without many compromises. If you want to know what being an entrepreneur is going to be like you didn’t get to sit in a classroom listening to lectures for a quarter and then write a business plan. (I also teach a less intense introduction class for engineers called the Spirit of Entrepreneurship and the Customer Development Class at Berkeley which I’ll describe in a future post.) I actually hoped that some students who were curious about entrepreneurship would discover that it is definitely not for them. Better to find it out in a classroom than as a career choice.
While that did happen to a few (some are still in shock that I “cold-call” in class, others can’t handle the team dynamics or complain that there is no “right” answer, or were disoriented that the mentors, professors and customers all had different answers) the class seems to have had the opposite effect on an interesting segment.
Sometimes you get emails like this at the end of class:
“Just want to say thank you for the “big ideas” you brought to us. Thanks to your class, I have been thinking thoroughly about my future career and have decided that I would become an entrepreneur rather than anything else. Actually I made up my mind just on my plane to my final round of interview with the Boston Consulting Group. I flew there and told the partner that I would become an entrepreneur instead.”
Oh, oh.
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Coming Soon In the fall Ann and I are going to develop a new graduate-level class for Stanford that will take this one to the next level. Students will not only have to assemble a team, come up with the idea and leave the classroom to test the business model – they’ll need to come back with real customer orders. (And if it’s a web-based product, they’ll have to build it.)
I wonder if we can fill the class.
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A few more of the final class presentations are here (click on the thumbnails to enlarge):
One of the classes I teach in the engineering school at Stanford is E145: the Fundamentals of Technology Entrepreneurship, an introduction to building a scalable startup. While the class is open to everyone at the University, we want to teach science and engineering undergraduates how they can take a technical idea and turn it into a profitable and scalable company.
The class which was authored by Tom Byers, is offered every quarter and taught by four different professors. But thanks to Tom, we all get to teach it with a slightly emphasis.
I taught the class this semester with Ann Miura-Ko a partner at Maples Investments.
Teaching Goals Our goal is to teach students the key concepts of the startup process and help them understand that a startup is a search for a profitable business model. We did this with twice weekly lectures and seven case studies. Most importantly we tied the lectures to a hands-on team project. Students formed 5-person teams, came up with a business idea then got out of the building to validate their business model. (And learn how to pivot their model as reality intrudes.)
Our goal was not to teach the students to write a business plan nor were we trying to teach them how to give a pitch to VC’s.
A Startup is a Search For A Business Model As I’ve described in previous posts; a startup is an organization formed to search for a repeatable and scalable business model.
A business model describes how your company creates, delivers and captures value. It’s best understood as a diagram that shows all the flows between the different parts of your company. This includes how the product gets distributed to your customers and how money flows back into your company. And it shows your company’s cost structures, how each department interacts with the others and where your company can work with other companies or partners to implement your business.
We want to teach our students to think about how their “idea” for a business translated into a business model and then to see if that business model will survive first contact with customers.
In our class Ann and I offered the students a template of a business model diagram. Their job was to get out of the building and transform the boxes into real data. (I’ll show you some of their examples at the end of this post.)
Class Lectures We had ten weeks and an hour and fifty minutes twice a week to cover the basics of a startup.
Our lectures were organized as:
Where do ideas come from?
How to decide whether an idea is a scalable business opportunity.
What is a business model?
Distribution, Demand Creation and Partnerships
Customer Discovery
First Team Presentation – What’s the Idea and How Large is the Opportunity
Regulation and Intellectual Property
Building Startup Teams
Metrics That Matter (Business Model Metrics)
Accounting Basics and Multi-stage Finance
Liquidity – the End Game
Final Team Presentation – What’s the Business Model?
Interspersed among the lectures were seven “case studies”: Chegg, IMVU, WebTV. Nanogene, Wily, Solidworks and Barbara Arenson. Each case study was a real world example of an issue an entrepreneur might encounter as they were building a company.
Final Team Project – What’s the Business Model? 11 student teams of 5 were working outside of class on the Opportunity Assessment Project. Each team had to take an original idea, come up with the positioning and analyze the potential size of the opportunity, propose a Business Model, and analyze and explain each of the parts of their model.
Customer Discovery Only 5 out of the 55 students had taken an entrepreneurial class before. None of the students were domain experts in their areas, and each team had to figure out how to contact potential customers and channel partners. Yet every team did figure out how to conduct extensive out of building Customer Discovery. (By design we didn’t give them too much Customer Development theory. The emphasis was on getting out of the building and testing their hypothesis.)
Here are some examples the “out of the building” work the students did.
Presenting the Project As their final project, each of the 11 teams had 15 minutes to present their conclusions and then later submit a written summary. (We were equally happy if the students discovered this would not be a profitable business as we were if they found a killer idea.) The presentations were graded on:
Did they quickly summarize their idea?
Did they articulate the problem?
Did they size the opportunity of solving the problem?
Was their solution clear? (for product companies, this should include manufacturing and cost of goods)
Did they describe demand creation and assign acquisition costs?
Did they describe lifetime value of a customer?
Did they describe distribution channel and assign channel costs?
Did they get out of the building?
Did they tell us what they learned from going out of the building?
Did they adequately diagram the business model?
Did they describe the risks?
Remember the goal was not a fundable pitch deck or a full business plan with pages of spreadsheets. Rather we wanted them to start with an idea and see what it would take to build a real business (and tell us in 15 minutes).
This post and the next will have a few of the final presentations (click on the thumbnails to enlarge.)
And here was another presentation in a very different market.
Lessons Taught
Entrepreneurship is an art not a science.
It is best learned by a combination of theory and practice.
No business model survives first contact with customers
You won’t believe this until you hear customers tell you you’re wrong.
Agility and resiliency are not tested inside the building.
This post is the latest in the “Secret History Series.” They’ll make much more sense if you read some of the earlier ones for context. See the Secret History video and slides as well as the bibliography for sources and supplemental reading.
It was only a matter of time before Stanford’s Applied Electronics Lab research on Electronic and Signals Intelligence and Lockheed’s missiles and spy satellites intersected. Here’s how.
LockheedAgena
Thor/AgenaD w/Corona
In addition to the CORONA CIA reconnaissance satellites, Lockheed was building another assembly line, this one for the Agena – a space truck. The Agena sat on top of a booster rocket (first the Thor, then the Altas and finally the Titan) and had its own rocket engine that would help haul the secret satellites into space. The engine (made by Bell Aerosystems) used storable hypergolic propellants so it could be restarted in space to change the satellite’s orbit. Unlike other second stage rockets, once in orbit, the CORONA reconnaissance satellite would stay attached to the Agena which stabilized the satellite, pointed it in the right location, and oriented it in the right direction to send its recovery capsule on its way back to earth.
Agena Ferrets – Program 11 As Lockheed engineers gained experience with the Agena and the CORONA photo reconnaissance satellite, they realized that they had room on a rack in the back of the Agena to carry another payload (as well as the extra thrust to lift it into space.) By the summer of 1962, Lockheed proposed a smaller satellite that could be deployed from the rear of the Agena. This subsatellite was called Program 11, or P-11 for short. The P-11 subsatellite weighed up to 350lbs, had its own solid rockets to boost it into different orbits, solar arrays for power and was stabilized by either deploying long booms or by spinning 60-80 times a second.
Agena Internals
And they had a customer who couldn’t wait to use the space. While the CORONA reconnaissance satellites were designed to take photographs from space, putting a radar receiver on a satellite would be enable it to receive, record and locate Soviet radars deep
inside the Soviet Union. For the first time, the National Security Agency (working through the National Reconnaissance Office) and the U.S. Air Force could locate radars which would threaten our manned bombers as well as those that might be part of an anti-ballistic missile system. Most people thought the idea was crazy. How could you pick up a signal so faint while the satellite was moving so rapidly? Could you sort out one radar signal from all the other noise? There was one way to find out. Build the instruments and have them piggyback on the Agena/CORONA photo reconnaissance satellites.
But who could quickly build these satellites to test this idea?
Stanford and Ferrets Just across the freeway from Lockheed’s secret CORONA assembly plant in Palo Alto, James de Broekert was at Stanford Applied Electronics Laboratory. This was the Lab founded by Fred Terman from his WWII work in Electronic Warfare.
“This was an exciting opportunity for us,” de Broekert remembered. “Instead of flying at 10,000 or 30,000 feet, we could be up at 100 to 300 miles and have a larger field of view and cover much greater geographical area more rapidly. The challenges were establishing geolocation and intercepting the desired signals from such a great distance. Another challenge was ensuring that the design was adapted to handle the large number of signals that would be intercepted by the satellite. We created a model to determine the probability of intercept on the desired and the interference environment from the other radar signals that might be in the field of view, de Broekert explained.
“My function was to develop the system concept and to establish the system parameters. I was the team leader, but the payloads were usually built as a one-man project with one technician and perhaps a second support engineer. Everything we built at Stanford was essentially built with stockroom parts. We built the flight-ready items in the laboratory, and then put them through the shake and shock fall test and temperature cycling…”
Agena and Ferret Subsatellite credit: USAF
Like the cover story for the CORONA (which called them Discoverer scientific research satellites,) the first three P-11 satellites were described as “science” missions with results published in the Journal of Geophysical Research.
Just fifteen years after Fred Terman had built Electronic Intelligence and Electronic Warfare systems for bombers over Nazi Germany, Electronic Intelligence satellites were being launched in space to spy on the Soviet Union.
Close to 50 Ferret subsatellites were launched as secondary payloads aboard Agena photo reconnaissance satellites.
Ferret Entrepreneur After student riots in April 1969 at Stanford shut down the Applied Electronics Laboratory, James de Broekert left Stanford. He was a co-founder of three Silicon Valley military intelligence companies: Argo Systems, Signal Science, and Advent Systems,
In 2000 the National Reconnaissance Office recognized James de Broekert as a “pioneer” for his role in the “establishment of the discipline of national space reconnaissance.”
“By knowing things that exist, you can know that which does not exist.”
Book of Five Rings
I was having coffee with a former student who was complained that my idea of building a first product release with a minimum feature set was a bad idea. (One of the principles of Customer Development is to get out of the building and understand the smallest feature-set customers will pay for in the first release.)
“Steve, you’re wrong. I can’t get more than one of ten potential customers to think that this is something they’d buy.” I asked, “So what does the one who likes it say?” “Well he didn’t like it either.” he replied, “but when I started talking about our entire vision, he couldn’t wait to help get our product into his company.”
The Minimum Feature Set is Not The Goal This minimum feature set (sometimes called the “minimum viable product”) causes lots of confusion. Founders act like the “minimum” part is the goal. Or worse, that every potential customer should want it. In the real world not every customer is going to get overly excited about your minimum feature set. Only a special subset of customers will and what gets them breathing heavy is the long-term vision for your product.
The reality is that the minimum feature set is 1) a tactic to reduce wasted engineering hours (code left on the floor) and 2) to get the product in the hands of early visionary customers as soon as possible.
You’re selling the vision and delivering the minimum feature set to visionaries not everyone.
Why A Minimum Feature Set? The minimum feature set is the inverse of what most sales and marketing groups ask of their development teams. Usually the cry is for more features, typically based on “Here’s what I heard from the last customer I visited.”
In the Customer Development model, the premise is that a very small group of early visionary customers will guide your product features until you find a profitable business model. Rather than asking customers explicitly about feature X, Y or Z, one approach to defining the minimum features set is to ask, “What is the smallest or least complicated problem that the customer will pay us to solve?”
This rigor of “no new features until you’ve exhausted the search for a business model” counters a natural tendency of people who talk to customers – you tend to collect a list of features that if added, will get one additional customer to buy. Soon you have a ten page feature list just to sell ten customers. Your true goal is to have a feature list that’s just a single paragraph long that you can sell to thousands of customers. Your mantra becomes “Less is more.”
You’re Selling The Vision Most startups following Customer Development and a Lean Startup methodology understand the idea of a minimal viable product. But they get it wrong in thinking that’s the point. It’s not.
Most customers will not want a product with a minimal feature set. In fact, the majority of customers will hate it. So why do it? Because you are selling the first version of your product to Earlyvangelists.
Earlyvangelists = Early Adopter + Internal Evangelist Earlyvangelists are a special breed of customers willing to take a risk on your startup’s product or service. They can actually envision its potential to solve a critical and immediate problem—and they have the budget to purchase it.Unfortunately, most customers don’t fit this profile.
Earlyvangelists can be identified by these characteristics:
They have a problem.
They understand they have a problem.
They are actively searching for a solution and has a timetable for finding it.
The problem is painful enough that they have cobbled together an interim solution.
They have, or can quickly acquire, dollars to purchase the product to solve their problem.
These Earlyvangelists are first buying the vision and then the product. They need to fall in love with the idea of your product. It’s the vision that will keep them committed the many times you screw up. You’ll have bugs, your product will eat their data, you’ll get the features wrong, performance will be bad, you’ll argue about pricing, etc.
But Earlyvangelists will stick with you through good and bad because they share your vision. In reality Earlyvangelists are now part of your team. If you’re selling to a business, your Earlyvangelists will end up using your slides and metrics to help sell your product inside their own company!
This means Earlyvangelists, particularly in corporations, will be buying into your entire vision, not just your first product release. They will need to hear what your company plans to deliver over the next 18 to 36 months.
That means your Product and Customer Development groups must agree that:
The minimum feature set is spec’d with Earlyvangelist interaction,
You will provide a one-page product vision or roadmap (typically 18 months to 3 years out) that’s shared with Earlyvangelists
Everyone (including the Earlyvangelists) understand the vision is subject to change.
Minimum feature set (“minimum viable product”) is a Customer Development tactic to reduce engineering waste and to get product in the hands of Earlyvangelists soonest.
Earlyvangelists require a 18 – 36 month product vision past the minimum feature set.
You’re selling the vision and delivering the minimum feature set.
Trading emails with a startup CEO building an iPhone app, I asked him why potential customers would buy his product. In response he sent me a competitive analysis. It looked like every competitive analysis I had done for 20 years, (ok maybe better.)
And it made me sad. Looking at the spreadsheet, I realized that competitive analysis tables are one of the ways professional marketers screw up startups from day one. And I had done my share.
Here’s why.
Prove What I Already Believe Most competitive analyses are: 1) sales documents for investors and/or 2) an attempt to rationalize the founders assumptions.
It’s Part of the Plan Most investors require you to write a business plan which includes a section called a “competitive analysis” in which you tell potential investors how your product compares to products other companies trying to develop and sell to the same customers. While most investors don’t actually read your business plan for a first meeting, a summary of your competitive analysis usually ends up as a slide or two in your PowerPoint presentation.
Your goal in this slide is to tell investors: 1) you understand the market you are selling to, 2) you understand the other companies selling in your market, and 3) you understand how and why you are better than any of the products currently in the market. You are also implicitly telling potential investors, “These features on our competitive slide mean we will sell a lot of what we are planning to build so invest in us.”
Death by Analysis I looked at the competitive analysis this startup CEO sent to me. This guy was experienced, he worked at lots of large companies, so the table was thorough, it had lots of rows and mentioned all the competitors.
Not only was it wrong, it would set his company back months and possibly even kill them.
Why?
Competitive Analysis Drives Feature Sprawl In most startups the competitive analysis feature comparison ends up morphing into the Marketing Requirements Document that gets handed to engineering. The mandate becomes; “Our competitors have these features so our startup needs them too. Get to work and add all of these for first customer ship.”
Product development salutes and gets to work building the product. Only after the product ships does the company find out that customers couldn’t have cared less about most of the bells and whistles.
Instead of optimizing for a minimum feature set (that had been defined by customers) a competitive analysis drives a maximum feature set.
This is not good.
Where Are the Customers? Here’s the problem: How did the founder know which features to choose on the competitive analysis table? When I was running marketing, the answer usually was, “We’ll put up whatever axes or feature comparisons that make us look best in this segment to potential investors. What else would you choose?”
At its best a competitive analysis assumes that you know why customers are going to buy your product. At its worst it exists to rationalize the founder’s assumptions about what they are building. This is a mistake – and it is a contributing factor (if not a root cause) of why most startups get their initial feature set wrong.
If you are building a competitive analysis table, do so onlyafter you understand that the features you are listing matter to customers. Most marketers are happy to build feature comparisons. But customers don’t buy features, they usually buy something that solves a real or perceived need. That’s the comparison you and your investors should be looking at - what do customers say they need or want?
The answer to that question is almost never in your building.
How to Make A Competitive Analysis Useful A competitive analysis makes sense when your startup is entering an Existing market – where the competitors are known, the customers are known, and most importantly – the basis of competition is known.
(The basis of competition are the features that customers in an existing market have said, “Yes, this is what is extremely important to me. I will dump my current supplier/manufacturer for your new product because yours is smaller/faster/easier to buy/get to/tastes better, etc.)
You win in an existing market when you are better or faster on those metrics that customers have told you are the basis of competition. Your competitive analysis must be around those metrics.
But most startups are not entering an Existing market. They may be trying to:
Take a segment of an existing market by offering a product that
1) costs less (trading fewer features for a lower price) or
2) addresses the specific needs of a customer segment that the existing suppliers have failed to address
Or they may be creating an entirely new market with a disruptive innovation that never existed before.
In a Resegmented market, a competitive analysis starts with the hypothesis of “Here’s the problem we are solving for customers.” The competitive analysis chart highlights the product features that differentiate your startup from the existing market incumbents because of your understanding of specific customer needs (not your opinion)in this niche.
In a New market a competitive analysis starts with the hypothesis of “We are creating something that never existed before for customers.” The competitive analysis table highlights the product features that show what customers could never do before. It compares your company to groups of products or services.
I asked the CEO to go back to the competitive analysis and tell me whether he really knew what features matter most to potential customers. If not, he should get out of the building and find out.
Lessons Learned
Too often competitive analysis drives product requirements in startups.
This can lead engineering to build the maximum feature set rather than minimum feature set.
You need to get outside the building and figure out what features matter to most customers.
Customer Development is a technique startups use to quickly iterate and test each part of their business model. How you execute Customer Development varies, depending on your type of business. In my book, “The Four Steps to the Epiphany” I use enterprise software as the business model example.
Ash Maurya, the CEO of WiredReach, has extended my work by building a model of Customer Development for Web Startups.
I think his process models are pretty good. Go read both of his posts on Discovery and Validation for web startups. His two key slides are at the end of this post but the details on his blog are worth reviewing.
Customer Development In Context Your startup is an organization built to search for a repeatable and scalable business model.
Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.
Customer Development is the process startups use to quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source.
Diving into the Customer Development diagram inside the diagram above, we see that the first two steps, Customer Discovery and Customer Validation are all about iteration and testing of your business model.
How you actually do Customer Discovery and Validation depends on what type of business you are in. What makes sense for startups selling Enterprise Software may not work for startups on the web. Therefore you need different versions of the actual steps of Customer Development for different types of businesses.
The Customer Discovery step for Enterprise Software Startups The first step in the Customer Development is Customer Discovery: testing your hypotheses. The flow for Customer Discovery for an enterprise software company was described in the Four Steps to the Epiphany. It looked like this:
.
The Customer Discovery step for Web Startups Ash Maurya‘s version of the Discovery step of Customer Development for a web startup looks like this:
.
Customer Validation for Enterprise Software Startups
The next step in the Customer Development process is Customer Validation – making sure that there really is a repeatable and scalable revenue and business model before you turn up your cash burn rate. My version of Customer Validation for an enterprise software company looked liked this:
.
Customer Validation for Web Startups Ash Maurya‘s version of the Valdiation step of Customer Development for a web startup looks like this:
Lessons Learned
A startup is an organization built to search for a repeatable and scalable business model.
Customer Development is a technique startups use to quickly iterate and test each part of their business model.
You need different versions of the actual steps of Customer Development for different types of businesses.
This post illustrates a version of Customer Development for startups on the web.
Startups that are searching for a business model need to keep score differently than large companies that are executing a known business model.
Yet most entrepreneurs and their VC’s make startups use financial models and spreadsheets that actually hinder their success.
Here’s why.
Managing the Business When I ran my startups our venture investors scheduled board meetings each month for the first year or two, going to every six weeks a bit later, and then moving to quarterly after we found a profitable business model.
If I knew what I knew now, I never would have let that happen. These financial documents were worse than useless for helping us understand how well we were (or weren’t) doing. They were an indicator of “I went to business school but don’t really know what to tell you to measure so I’ll have you do these.”
To be clear – Income Statements, Balance Sheets and Cash Flow Statements are really important at two points in your startup. First, when you pitch your idea to VC’s, you need a financial model showing VC’s what your company will look like after you are no longer a startup and you’re executing the profitable model you’ve found. If this sounds like you’re guessing – you’re right – you are. But don’t dismiss the exercise. Putting together a financial model and having the founders understand the interrelationships of the variables that can make or break a business is a worthwhile exercise.
The second time you’ll need to know about Income Statements, Balance Sheets and Cash Flow Statements is after you’ve found your repeatable and profitable business model. You’ll then use these documents to run your business and monitor your company’s financial health as you execute your business model.
The problem is that using Income Statement, Balance Sheets and Cash Flow Statements any other time, particularly in a startup board meeting, has the founding team focused on the wrong numbers. I had been confused for years why I had to update an income statement each board meeting that said zero for 18 months before we had any revenue.
But What Does a Business Model Have to Do With Accounting in My Startup? A startup is a search for a repeatable and scalable business model. As a founder you are testing a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel? How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.
An early indication that you’ve found the right business model is when you believe the cost of getting customers will be less than the revenues the customers will generate. For web startups, this is when the cost of customer acquisition is less than the lifetime value of that customer. For biotech startups, it’s when the cost of the R&D required to find and clinically test a drug is less than the market demand for that drug. These measures are vastly different from those captured in balance sheets and income statements especially in the near term.
What should you be talking about in your board meeting? If you are following Customer Development, the answer is easy. Board meetings are about measuring progress measured against the hypotheses in Customer Discovery and Validation. Do the metrics show that the business model you’re creating will support the company you’re trying to become?
Startup Metrics Startups need different metrics than large companies. They need metrics to tell how well the search for the business model is going, and whether at the end of that search is the business model you picked worth scaling into a company. Or is it time to pivot and look for a different business model?
Essentially startups need to “instrument” all parts of their business model to measure how well their hypotheses in Customer Discovery and Validation are faring in the real world.
For example, at a minimum, a web based startup needs to understand the Customer Lifecycle, Customer Acquisition Cost, Marketing Cost, Viral Coefficient, Customer Lifetime Value, etc. Dave McClure’s AARRR Model is one illustration of the web sales pipeline.
At a web startup, our board meetings were discussions of the real world results of testing our hypotheses from Customer Discovery. We had made some guesses about the customer pipeline and now we had a live web site. So we put together a spreadsheet that tracked these actual customer numbers every month. Every month we reported to our board progress on registrations, activations, retained users, etc. They looked like this:
User Base
Registrations (Customers who completed the registration process during the month)
Activations (Customers who had activity 3 to 10 days after they registered. Measures only customers that registered during that month)
Activation/Registrations %
Retained 30+ Days
Retained 30+/ Total Actives %
Retained 90+ Days
Retained 90+/Total Actives %
Paying Customers (How many customers made $ purchases that month)
Paying/(Activations + Retained 30+)
Financials
Revenue
Contribution Margin
Cash
Burn Rate
Months of cash left
Customer Acquisition
Cost Per Acquisition Paid
Cost Per Acquisition Net
Advertising Expenses
Viral Acquisition Ratio
Web Metrics
Total Unique Visitors
Total Page Views
Total Visits
PV/visit
A startup selling via a direct sales force will want to understand: average order size, Customer Lifetime Value, average time to first order, average time to follow-on orders, revenue per sales person, time to salesperson becomes effective.
Regardless of your type of business model you should be tracking cash burn rate, months of cash left, time to cash flow breakeven.
Tell Them No If you have venture investors, work with them to agree what metrics matter. What numbers are life and death for the success of your startup? (These numbers ought to be the hypotheses you’re testing in Customer Discovery and Validation.) Agree that these will be the numbers that you’ll talk about in your board meeting. Agree that there will come times that the numbers show that the business model you picked is not worth scaling into a company. Then you’ll all agree it’s time to pivot and look for a different business model.
You’ll all feel like you’re focused on what’s important.
Lessons Learned
Large companies need financial tools to monitor how well they are executing a known business model.
Income Statements, Balance Sheets and Cash Flow Statements are good large company financial monitoring tools.
Startups need metrics to monitor how well their search for a business model is going.
Startups need metrics to evaluate wither the business model you picked is worth scaling into a company.
Using large company financial tools to measure startup progress is like giving the SAT to a first grader. It may measure something in the future but can only result in frustration and confusion now.
It’s been a year since I’ve been blogging. The 100 or so posts add up to about 300 pages of text.
One of the downsides to a large number of blog posts is that older stories tend to get buried and hidden. Categories and indexes on the web pages aren’t quite the right metaphor or substitute for random access. So bowing to popular demand the 2009 blog posts are now available on Amazon on a portable device which provides instant and random access to any post and does not require power or an internet connection.
Recursive History
These blogs began as an attempt to explain why a “book” I wrote wasn’t a book. And now they’re a book of their own. (Confused? Read on.)
After I retired, I began teaching Customer Development, a theory of how to reduce early stage risk in entrepreneurial ventures. The first time I taught the class at the Haas Business School, U.C. Berkeley, I had a few hundred pages of course notes. Students began to ask for copies of the notes so I threw a cover on them and self-published the notes as a “book” at Cafepress.com.
Two years later, Eric Ries mentioned that I could list the book on Amazon. I never imagined more than a few hundred copies would be sold to my students. 15,000 copies later, the horrifically bad proofreading, design and layout is now a badge of honor. You most definitely read the book for the content. (Congratulations to all of you who actually managed to slog through it.)
You tell much better stories than you write
A few years later my teaching assistants at Stanford and Berkeley said, “You tell much better stories than you write.” They suggested that sharing those stories on the web was the best way to illustrate some of the more salient points of what even I will admit is a difficult text.
It Wasn’t Just Me It’s possible to read this past year of posts and think that I was the only one at these companies. Nothing could be further from the truth. I’ve been lucky enough to work with, around and near some extraordinary people: Bill Perry, Allen Michels, Rob Van Naarden, John Moussouris, John Hennessy, Skip Stritter, Jon Rubenstein, Gordon Bell, Glen Miranker, Cleve Moler, Tom McMurray, John Sanguinetti, Alvy Ray Smith, Chris Kryzan, Karen Dillon, Margaret Hughes, Peter Barrett, Bruce Leak, Jim Wickett, Karen Richardson, Ben Wegbreit, Greg Walsh, John McCaskey, Roger Siboni, Bob Dorf, Steve Weinstein, Fred Amoroso, Fred Durham, Maheesh Jain, Will Harvey, Eric Ries, Kathryn Gould, Jon Feiber, Mike Maples, Ann Miura-Ko and many, many more.
Getting Organized
These blog posts were written as I thought about them, with little thought about organization by topic.
This new “book,” Not All Those Who Wander Are Lost, attempts to remedy that by organizing the 2009 blog posts in a coherent fashion.
Not All Those Who Wander Are Lost:
Table of Contents
Startup Culture
Am I a Founder? The Adventure of a Lifetime…………….. 3
Agile Opportunism – Entrepreneurial DNA………………..5
Faith-Based versus Fact-Based Decision Making……….. 8
The Sharp End of the Stick…………………………………… 12
Preparing for Chaos – the Life of a Startup……………….. 15
Speed and Tempo – Fearless Decision Making for Startups….. 16
Killing Innovation with Corner Cases and Consensus….. 18
The “Good” Student……….. 20
Touching the Hot Stove – Experiential versus Theoretical Learning……. 22
Burnout……….. 24
The Road Not Taken……….. 28
Ask and It Shall be Given……….. 31
Selling with Sports Scores……….. 34
Love/Hate Business Plan Competitions……….. 39
The Elves Leave Middle Earth – Sodas Are No Longer Free……….. 41
Stories from the Trenches
Raising Money Using Customer Development……….. 47
Lessons Learned – A New Type of Venture Capital Pitch……….. 52
Can You Trust Any VC’s Under 40?………………. 56
Are Those My Initials?……………………………… 60
They Raised Money With My Slides?!……………. 62
The Best Defense is a Good IP Strategy………….. 65
Elephants Can Dance – Reinventing HP……….. 69
Customer Development Manifesto The Leading Cause of Startup Death: The Product Development Diagram. 75
Reasons for the Revolution (Part 1)……….. 79
Reasons for the Revolution (part 2)……….. 84
The Startup Death Spiral……….. 87
Market Type……….. 90
The Path of Warriors and Winners……….. 93
Customer Development In the Real World
Customer Development is Not a Focus Group……….. 99
Lean Startups aren’t Cheap Startups……….. 102
Times Square Strategy Session – Web Startups and Customer Development……….. 105
Coffee With Startups……….. 108
He’s Only in Field Service……….. 110
Let’s Fire Our Customers……….. 113
Durant Versus Sloan……….. 116
Family – This Life Isn’t Practice For the Next One
Lies Entrepreneurs Tell Themselves……….. 121
Epitaph for an Entrepreneur……….. 124
Thanksgiving Day……….. 129
Unintended Lessons……….. 137
Ardent – Learning How To Get Out of the Building
Supercomputers Get Personal……….. 141
Get Out of My Building……….. 145
Supercomputer Porn……….. 148
You Know You’re Getting Close to Your Customers When They Offer You a Job……….. 151
The Best Marketers Are Engineers……….. 154
Listen more, talk less……….. 157
Closure……….. 160
SuperMac – Learning How To Build A Startup Team
Joining SuperMac……….. 165
Facts Exist Outside the Building, Opinions Reside Within –……….. 167
Customer Insight Is Everyone’s Job……….. 174
Repositioning SuperMac – “Market Type” at Work……….. 176
Strategy versus Relentless Tactical Execution — the Potrero Benchmarks… 179
Building The Killer Team – Mission, Intent and Values……….. 184
Rabbits Out of the Hat – Product Line Extensions……….. 189
Cats and Dogs – Admitting a Mistake……….. 194
Sales, Not Awards……….. 196
The Video Spigot……….. 200
The Curse of a New Building……….. 205
Rocket Science Games – Hubris and the Fall
Drinking the Kool-Aid……….. 211
Hollywood Meets Silicon Valley……….. 214
The Press is Our Best Product……….. 216
Who Needs Domain Experts……….. 219
Rocks in the Rocket Science Lobby……….. 223
The Secret History of Silicon Valley
If I Told You I’d Have to Kill You……….. 227
Library Hours at an Undisclosed Location……….. 248
Happy 100th Birthday Silicon Valley……….. 254
Every World War II Movie was Wrong……….. 258
We Fought a War You Never Heard Of……….. 263
A Wilderness of Mirrors……….. 270
The Rise of Entrepreneurship……….. 271
Stanford Crosses the Rubicon……….. 279
The Rise of “Risk Capital” Part 1……….. 285
The Rise of “Risk Capital” Part 2……….. 289
In my last post I described what happened when a company prematurely scales sales and marketing before adequately testing its hypotheses in Customer Discovery. You would think that would be enough to get wrong, but entrepreneurs and investors compound this problem by assuming that all startups grow and scale by executing the Revenue Plan.
Reality Meets the Plan I got to see this first hand as an observer at a board meeting I wish I could have skipped.
We were at the board meeting of company building a radically new type of communication hardware. The company was going through some tough times. It had taken the company almost twice as long as planned to get their product out the door. But that wasn’t what the heat being generated at this board meeting was about. All discussion focused on “missing the revenue plan.”
Spread out in front of everyone around the conference table were the latest Income Statement, Balance Sheets and Cash Flow Statements. The VC’s were very concerned that the revenue the financial plan called for wasn’t being delivered by the sales team. They were also looking at the Cash Flow Statement and expressed their concern (i.e. raised their voices in a annoyed investor tone) that the headcount and its attendant burn rate combined with the lack of revenue meant the company would run out of money much sooner than anyone planned.
Lets Try to Make the World Match Our Spreadsheet The VC’s concluded that the company needed to change direction and act aggressively to increase revenue so the company could “make the plan.” They told the CEO (who was the technical founder) that the sales team should focus on “other markets.” Another VC added that engineering should redesign the product to meet the price and performance of current users in an adjacent market.
The founder was doing his best to try to explain that his vision today was the same as when he pitched the company to the VC’s and when they funded the company. He said, “I told you it was going to take it least five years for the underlying industry infrastructure to mature, and that we had to convince OEMs to design in our product. All this takes time.” But the VC’s kept coming back to the lack of adoption of the product, the floundering sales force, the burn rate – and “the plan.”
Given the tongue-lashing the VC’s were giving the CEO and the VP of Sales, you would have thought that selling the product was something any high-school kid could have done.
What went wrong?
Revenue Plan Needs to Match Market Type What went wrong was that the founder had built a product for a New Market and the VC’s allowed him to execute, hire and burn cash like he was in an Existing Market.
The failure of this company’s strategy happened almost the day the company was funded.
Make the VC’s Happy – Tell Them It’s a Big Market There’s a common refrain that VC’s want to invest in large markets >$500Million and see companies that can generate $100M/year in revenue by year five. Enough entrepreneurs have heard this mantra that they put together their revenue plan working backwards from this goal. This may actually work if you’re in an existing market where customers understand what the product does and how to compare it with products that currently exist. The company I observed had in fact hired a VP of Sales from a competitor and staffed their sales and marketing team with people from an existing market.
Inconsistent Expectations The VC’s had assumed that the revenue plan for this new product would look like a straight linear growth line. They expected that sales should be growing incrementally each month and quarter.
Why did the VC’s make this assumption? Because the company’s initial revenue plan (the spreadsheet the founders attached to the business plan) said so.
What Market Type Are We? Had the company been in an Existing Market, this would have been a reasonable expectation.
Existing Market Revenue Curve
But no one (founders, management, investors) bothered to really dig deep into whether that sales and marketing strategy matched the technical founder’s vision or implementation. Because that’s not what the founders had built. They had designed something much, much better – and much worse.
The New Market The founders had actually built a new class of communication hardware, something the industry had never seen before. It was going to be the right product – someday – but right now it was not the mainstream.
This meant that their revenue plan had been a fantasy from day one. There was no chance their revenue was going to grow like the nice straight line of an existing market. More than likely the revenue projection would resemble the hockey stick like the graph on the right.
New Market Revenue Curve
(The small hump in year 1 is from the early adopters who buy one of anything. The flat part of the graph, years 1 to 4 is the Death Valley many companies never leave.)
Companies in New Markets who hire and execute like they’re in an Existing Market burn through their cash and go out of business.
Inexperienced Founders and Investors I realized I was watching the consequences of Catch 22 of fundraising. Most experienced investors would have understood new markets take time, money and patience. This board had relatively young partners who hadn’t quite grasped the consequences of what they had funded and had allowed the founder to execute a revenue plan that couldn’t be met.
Six months later the VC’s were still at the board table but the founder was not.
Lessons Learned
Customers don’t read your revenue plan.
Market Type matters. It affects timing of revenue, timing of spending to create demand, etc.
Make sure your revenue and spending plan matches your Market Type.
Make sure the founders and VC’s agree on Market Type strategy.
The Customer Development process is the way startups quickly iterate and test each element of their business model, reducing customer and market risk. The first step of Customer Development is called Customer Discovery. In Discovery startups take all their hypotheses about the business model: product, market, customers, channel, etc. outside the building and test them in front of customers.
At least that’s the theory. Helping out some friends I got to see firsthand the consequence of skipping Customer Discovery.
It’s A Marketing Problem After I retired I would get calls from VC’s to help with “marketing problems” in their portfolio companies. The phone call would sound something like: “We have a company with great technology and a hot product but at the last board meeting we determined that they have a marketing problem. Can you take a look and tell us what you think?”
A week later I was in the conference room of the company having a meeting with the CEO.
We Have a Marketing Problem “So VC x says you guys have a marketing problem. How can I help?” CEO – “Well, we’ve missed our sales numbers for the last six months.” Me – “I’m confused. I thought you guys have a marketing problem. What does this have to do with missing your sales plan? CEO – “Well our VP of Sales isn’t making the sales plan and he says it’s a marketing problem, and he’s a really senior guy.”
Now, I’m intrigued. The CEO asks the VP of Sales to join us in the conference room. (Note that most VP of Sales’ have world-class antenna for career danger. Being invited to chat with the CEO and an outside consultant that a board member brought in creates enough tension in a room to create static discharge.)
No One is Buying Our Product “Tell me about the marketing problem.” VP of Sales – “Marketing’s positioning and strategy is all wrong.” Me – “How’s that?” VP of Sales – “No one is interested in buying our product.”
If you’ve been in marketing long enough you recognize the beginning of the sales versus marketing finger pointing. (It usually ends up bad for all concerned.) Sales’ is on the hook for making the numbers and things aren’t looking good.
Six is a Proxy for Burn Rate “How many salespeople do you have?” VP of Sales – “Six in the field, plus me.” Later I realized six salespeople without revenue to match was a proxy for an out of control burn rate that now had the boards serious attention.
There’s Always One in Boston “Is there a salesperson in Boston?” VP of Sales – “Sure.” Me – “What sales presentation is he using? VP of Sales – “The corporate presentation. What else do you think he’d be using?” Me – “Let’s get him on the phone and ask.”
Sure enough we’d get the sales person on the phone and find out that he stopped using the corporate presentation months ago. Why? The standard corporate presentation wasn’t working, so the Boston sales rep made up his own. (I asked for the Boston sales rep because in the U.S. they’re furthest from the Silicon Valley corporate office and any oversight.)
We call the five other sales people and find that they are also “winging it.”
Early Orders Were a Detriment I learned that the founders received their initial product orders from their friends in the industry and through board members personal connections. These “friends and family orders” made the first nine months of their revenue plan. With that initial sales “success” they began to hire and staff the sales department per the ”plan.” That’s how they ended up with seven people in sales (plus three more in marketing.)
But now the bill had come due. It turned out that these “friends and family orders” meant the company really hadn’t understood how and why customers would buy their product. There was no deep corporate understanding about customers or their needs. The company had designed and built their product and assumed it was going to sell well based on their initial early orders. Marketing was writing presentations and data sheets without having a clue what real problems customers had. And without that knowledge, sales essentially was selling blind.
Advice You Don’t Want to Hear My report back to the VC? Missing the sales numbers had nothing to do with marketing. The problem was much, much worse. The company had failed to do any Customer Discovery. Neither the CEO, VP of Sales or VP of Marketing had any idea what a repeatable sales model would look like before they scaled the sales force. Now they had a sales force in Brownian motion in the field, and a marketing department changing strategy and the corporate slide deck weekly. Cash was flowing out of the company and the VP of Sales was still hiring.
I suggested they cut the burn rate back by firing all the salespeople in the field, (keeping one in Silicon Valley,) and get rid of all of marketing. The CEO needed to get back to basics and personally get out of the building in front of customers to learn and discover what problems customers had and why the company’s product solved them.
The VC’s response? “Nah, it can’t be that bad, it’s a marketing problem.”
I’ll leave it to you to guess what the VC’s did six months later.
Lessons Learned
Premature Scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup.
Scale sales and marketing after the founders and a small team have found a repeatable sales model.
Early sales from board members or friends are great for morale and cash but may not be indicative of learning and discovering a business model.
One of the hardest problems for engineers in founding roles in a startup is interacting with customers up close and personal. Over the years I’ve found the best way to learn to do this is by emulating empathy.
The Problem I was having dinner in Palo Alto with some of my Stanford engineering students and one of the subjects they were most interested in talking about was “how do you really get out of the building and talk to customers.” Listening to them reminded me how terribly painful it had been for me.
Data Driven I was always curious about technology and how things worked, but early in my career, this curiosity didn’t extend to people. I was more comfortable with data.
In my first company, ESL, I sat in secure locations and taught complex intelligence gathering systems to a classroom of maintenance and/or operations students. I was essentially responsible for imparting a fire hose of technical information efficiently. At my next company, Zilog, it was the same – I taught microprocessor system design to engineers. It was all about the efficient transfer of knowledge. High bandwidth, low noise.
But later at Zilog I moved into marketing. While I learned how to write data sheets, product marketing at Zilog was very little “listen to customers” and much more “talk at customers.” It wasn’t until my next company, Convergent Technologies, that I began to understand the value of customer interaction. As a product marketing manager, I traveled to customers at the behest of our sales people to impart the latest technical wisdom from the factory. Traveling with these salesmen was eye opening – they were comfortable having conversations with strangers and knew how to build rapport, relationships and trust. These guys explained to me that most people were happy to talk about themselves. My job was just to get the conversation started. Our products improved as our salesmen made customers comfortable enough to share their needs and issues. (As I would find out, every one of these salesmen had been design engineers in their past. Yet most of the time, they artfully hid how much they knew.)
Emulation I began to understand that while my brain was wired to dive into technical minutia and exchange product information at high speed, this wasn’t what most potential customers (and most people who had a modicum of social skills) wanted to do. In fact, unbelievably (to me) most people would trade valuable time in a meeting for social niceties.
Although these social cues were something that still didn’t come naturally to me, I concluded that to get much further in my career, I was going to have to have to learn. Over time, I watched how the best sales people did it and emulated their behavior. I learned how to smile, shake hands, make eye contact rather than stare at my shoes, talk about sports, ask customers about their jobs, their families, etc. and evidence apparent interest in people I didn’t know way before we got to chat about products. I’d even go out to lunch or dinner and manage to hold a conversation. The two hardest things to learn were: how to speak in front of a group and to make “cold calls” by myself. (Every once in awhile I’d run into a customer wired like me who’d say, “Can we cut the chatter and get down to business?” I’d laugh, and we’d do a high-speed data transfer.)
Surprisingly, I learned that listening to customers and others made me more creative. My best ideas started coming from brainstorming with others, something just not possible when communication was a one-way street.
Fast forward a few companies – MIPS and Ardent – I was still learning (at times painfully) to appreciate that facts were outside the building and not between my ears. After a decade in Silicon Valley, I had finally learned to emulate empathy.
Emulating Empathy By the time I got to SuperMac, the transformation had taken hold. It was here that I began to teach others what I had learned.
I had inherited a manager of technical marketing, much smarter than me but with zero instinct or feel for customers. He was completely data driven, and our sales department wanted him nowhere near customers. I felt like I had just met my doppelganger from ten years ago. We established that his world view was not shared by most customers. And he understood that if he wanted a bigger role in marketing, he was going to have to change. So I ran the first of what would be many “how to emulate empathy” classes.
I described how getting closer to customers was at first going to be a cerebral rather than gut activity. With no instinct to guide him, he would have to consciously precompute what kind of response each situation called for and play them back when appropriate. He was going to have to sign up for public speaking classes. He was going to go on the road with our sales people, but this time he was going to have to watch what they do and start to copy them. I found him a mentor in a salesman who appreciated his technical skill and was willing to let him tag along.
As expected, the first couple of months was tough – on him, sales and customers. We’d debrief after many of his road trips and calls and course correct as necessary. (At times I’d feel like I was talking to some earlier version of myself.) But by the end of the year, he had learned enough that the VP of Sales asked whether he could move permanently into a presales support role.
Repeatability Over the next ten years in startups, I repeated this process with others. Today I remind my engineering students that empathy, while seemingly a foreign language, is possible to learn.
As for me, what I had emulated became second nature. Most of the time I can’t tell which mode is running.
Lessons Learned
Customer metrics are not the same as customer interaction.
Customer interaction is necessary for startup founders.
For some it is extremely difficult.
If it’s not instinctual customer empathy is a skill that can be taught and learned.
Entrepreneurs and the early startup team all need to be motivated by a shared vision, passion and desire to build a large company. Yet it’s the company legends that live on.
Fund Raising Our little startup was less than a year-old. We had been busy assembling our team and had just hired the last member of our exec staff. We had also just closed our Series B financing with a major overseas partner. The financing felt like a real validation of our strategy. In truth, it was only proof that our reality distortion field worked in Asia as well.
My Wife Thinks I Deserve a Bonus One of the new hires was Bob, my VP of Business Development. He knew so little about technology that I used to say he needed a manual to operate a light switch, but I hired him because a small voice said, “He’ll do extraordinary things.”
He did. And still does.
Bob, among other things ran the fundraising for us in Asia and worked with an outside firm that had great connections in Japan to drag us around Tokyo and get the deal closed. As in raising $10Million dollars kind of closed.
Everyone at our startup was working on startup starvation salaries, and Bob had taken a large pay cut to join us. When the Japanese partner deal was done, Bob said, “Steve, I deserve at least a $10,000 bonus. I haven’t been home in weeks, and I pulled off a financing even you admit was unbelievable.”
I patiently explained that this type of miraculous event was the norm for startups. The engineers were pulling off miracles on a daily basis, we were all taking fumes for salaries, but our payoff will be when our stock is worth something. Until then, tell your wife you’ll get $10,000 when hell freezes over. No bonuses in a startup. To his credit Bob said while he understood, he was going to hear about it at home for not being appreciated.
Dinner Since our management team hadn’t met each others’ spouses, I thought the financing would be a great reason to get everyone together for a low key celebratory dinner. We picked a restaurant in Palo Alto down the street from the company and got a private room.
We drank lots of wine, had a nice dinner and after the dinner plates had been cleared I made a speech about teamwork, startup, passion, commitment, blah, blah.
I then congratulated the outside firm that Bob had used in Japan. I had invited their CEO and his wife and handed him a check for their retainer bonus for their help in the deal. Bob kept glancing at his wife who was giving him frosty looks and was very clearly not happy.
The New Briefcase I then announced that it was unfair that Bob shouldn’t go unrecognized for his hard work so I had an award for him as well. The atmosphere around Bob’s wife began to thaw. I said, “Bob had carried the same old beat up leather briefcase he had since law school and I knew he wouldn’t trade it for anything but I think its time he had something more professional looking. So Bob, on behalf of the company, we bought you a new briefcase.”
The look on both Bob’s face and his wife’s went from happy to disbelief, to “I can’t believe you’re working for this idiot” on his wife’s face to “I can’t believe I work for this idiot” on Bob’s face.
I said, “Your new briefcase is under the table by your feet. Why don’t you just put it on the table.” Bob rooted around a bit and found the briefcase and put it on the table. It was the ugliest and cheapest briefcase you will ever see.
Everyone was now looking slightly embarrassed, all thinking that perhaps they had the most obtuse CEO in Silicon Valley. I thought Bob’s wife was going to throw a steak knife across the table. I made another speech about how great Bob was and then sat down and said, “Lets get the waiter for coffee and desert.”
The ugly briefcase with its implicit statement sat on the table virtually steaming.
Legend “Oh, one more thing,” I said. “Bob, can you open up the briefcase and dump the papers on the table. We should clear out the stuffing so you can put your papers from your old briefcase in it.”
With almost an audible sigh, Bob unlatched the briefcase, held it upside down over the table and dumped out the contents.
In slow motion, dollar bills began to tumble out of the new briefcase. And they kept coming out. And they started making a pile of bills in front of Bob and his wife and the rest of the executive staff.
15,000 dollars in dollar bills.
Bob’s wife started crying.
I said, “Extraordinary work in a startup is the norm, but you performed even beyond my expectations. In my startups that’s worth recognizing.”
Rewards for extraordinary effort became part of the company’s legend.
Epilogue
Lest you think only salespeople are motivated by cash in a startup, over the life of the company we sprung the same surprise on engineers who did deliver the impossible. And at Christmas we gave out hundred dollar bills to each employee. While this small token of appreciation would have been dismissed if it had been a check, it had our engineers showing these bills to their friends in other companies.
In three or so years these cash incentives added up to no more than $50K. While everyone understood the theory that we were working to make the stock valuable (and we did,) the cash reminded them that we cared and noticed.
Lessons Learned
Cash has a much greater affect than a check.
Awards for critical contributions can make a lasting impact.
Small amounts spread through the company can be a great motivator.
In the 1950’s the U.S. Military and the CIA enlisted balloons (some as tall as a 40-story building) as weapons systems targeting the Soviet Union. Throughout the decade they launched a series of Top Secret/codeword balloon projects and thousands of balloons, to gather intelligence about the Soviet Union. The stories of these programs are interesting but the unexpected consequences of their secrecy created a mythology that outlasted the missions.
Why Balloons? Balloons had attributes that airplanes couldn’t match – they could stay aloft for a long time (days or even weeks,) they could reach altitudes where airplanes couldn’t fly (100,000 feet,) and they could go places that were too dangerous for manned aircraft (flying over the Soviet Union.)
The Search for Soviet Nuclear Weapons Project MOGUL was an Air Force balloon program to detect Soviet nuclear tests by listening to sound waves traveling through the upper atmosphere. During World War II, scientists had discovered the existence of an ocean layer that conducted underwater sound for thousands of miles. They thought that a similar sound channel might exist in the upper atmosphere. If they could put microphones in the upper atmosphere, the U.S. thought they might be able to hear Soviet nuclear tests and even detect ballistic missiles launches heading toward their targets. Designed to test this theory, Project Mogul balloons carried microphones up to the sound channel to “listen” and radio transmitters to send the sound to the ground. At first, project MOGUL flights involved trains of small weather balloons up to 600 feet in length. Later MOGUL flights used the large polyethylene balloons developed for the Navy’s SKYHOOK.
Flying Sandwich Bags – SKYHOOK SKYHOOK balloons, funded by the Office of Naval Research, were designed to stay at a fixed altitude (~100,000 feet) and carry a payload of thousands of pounds. They were huge, 400 feet high, made possible because the then new material called polyethylene. These “flying sandwich bags” were built by a company that had experience using this material in packaging – General Mills (the same company that makes Cheerios.)
Sniffing for a Reactor – Nuclear Air Sampling – ASHCAN
In 1957 the Air Force started Project ASHCAN (using SKYHOOK class balloons at 100,0000 feet) to take high altitude air samples and search for nuclear particles and trace gases in fallout from tests in the Soviet Union. For the first time, U.S. intelligence could estimate the amount of plutonium being produced by Soviet weapons production reactors. These balloons were secretly launched from Brazil and the Panama Canal Zone, and from air force bases in the U.S. Over time, U.S. intelligence also used reconnaissance planes like the U-2, RB-57’s, and C-130 aircraft to collect air samples.
Genetrix Launched from the U.S.S. Valley Forge
Ballooning Over the Soviet Union – GENETRIX While the nuclear detection balloons did their spying while flying above the U.S. or allied countries, the next series of balloons flew over the Soviet Union.
In the 1950’s, while U.S. reconnaissance aircraft flew around the periphery of the Soviet Union, U.S. military planners still had virtually no information about what was going on in vast areas of the Soviet territory. While there were a few overflights of the Soviet interior in the early 1950’s these missions were extremely risky and couldn’t provide enough information to assess Soviet military strength. Spy satellites and the U-2 spy planes were still far in the future so the U.S. military became big fans of reconnaissance balloons as a solution to this problem.
In 1950 the Air Force thought that high-altitude balloons might be used to perform photo and ELINT spyflights over the Soviet Union. They placed aerial reconnaissance cameras on the balloons and ran a series of test programs (code names of GOPHER, MOBY DICK, GRANDSON and GRAYBACK) launching 640 balloons from New Mexico, Montana, the West Coast, Missouri and Georgia. With the tests completed, the program name changed to GENETRIX and was given the designation of Weapons System 119L.
In late 1955 President Eisenhower gave the ok to launch the GENETRIX balloons over the Soviet Union. Hundreds of these balloons took off from secret sites in Norway, Scotland, West Germany, and Turkey carrying a gondola with two reconnaissance cameras.
The United States launched 516 of the GENETRIX balloons but only 44 or so made it out of the Soviet Union. The rest landed on Soviet farms dumping 600-pound cameras in hayfields. We did get coverage of about 8 percent of the Soviet Union, but politically it created a lot of tension as cameras were popping up on Khrushchev’s desk. “Oh, another balloon Mr. Premier.” The Soviets put on a public exhibition of the equipment.
Bigger and Better-MELTING POT Never one to give up, the military suggested a bigger and better balloon program. Since the GENETRIX balloons flying at 55,000 feet were relatively easy for Soviet fighters to intercept, the new balloons would be built around the Navy SKYHOOK design and fly at 100,000 feet for up to a month. These balloons would carry a new reconnaissance camera, built by the Boston University Physical Research Lab. Three of these balloons were launched in July 1958 from an aircraft carrier off the east coast of Japan (in those months the jet stream at the altitude went west to east.) All three accidentally dropped their gondolas over Communist territory. President Eisenhower cancelled all the balloon overflights.
Unexpected Consequences – UFO’s in the 1950’s All these balloon flights had an unexpected consequence on a jittery and paranoid nation in the Cold War. Before sunrise and after sunset, while the Earth below was dark, high altitude balloons were still lit by sunlight, and their plastic skin glowed and appeared to change color with the change in sun angle. Some of the Project Mogul balloon flights were launched from Alamogordo Air Base in New Mexico in 1947, and a few crashed nearby – one near a town called Roswell. The start of the Mogul balloon flights coincided with the first reports of UFO’s. To someone on the ground, these balloons may have looked like UFOs.
While the U.S. launched thousands of balloons through the 1950′s, MOGUL, ASHCAN and GENETRIX were the CIA/military’s most closely guarded secret projects. Balloon sightings were dismissed with cover story: they were just weather balloons. Even as one part of the military tried to investigate these sightings, the other kept them away from the true purpose of the balloon missions.The reason for the denials – 1) the Soviets could have masked their nuclear tests and filtered their reactor emissions if they knew what we were sampling and 2) GENETRIX balloon flights over the Soviet Union were a violation of international law.
The thousands of classified balloon flights are a possible explanation of of UFO sightings in the 1950′s and the claim of military cover-ups.
Success consists of going from failure to failure without loss of enthusiasm.
Winston Churchill
Everyone knows what a startup is for – don’t they?
In this post we’re going to offer a new definition of why startups exist: a startup is an organization formed to search for a repeatable and scalable business model.
A business model describes how your company creates, delivers and captures value.
Or in English: A business model describes how your company makes money.
(Or depending on your metrics for success, get users, grow traffic, etc.)
Think of a business model as a drawing that shows all the flows between the different parts of your company. A business model diagram also shows how the product gets distributed to your customers and how money flows back into your company. And it shows your company’s cost structures, how each department interacts with the others and where your company fits with other companies or partners to implement your business.
While this is a mouthful, it’s a lot easier to draw.
Drawing A Business Model Lots of people have been working on how to diagram and draw a business. I had my students drawing theirs for years, but Alexander Osterwalder’s work on business models is the clearest description I’ve read in the last decade. The diagram below is his Business Model template. In your startup’s business model, the boxes will have specific details of your company’s strategy.
Alexander Osterwalder's Business Model Template
(At Stanford, Ann Miura-Ko and I have been working on a simplified Silicon Valley version of this model. Ann will be guest posting more on business models soon.)
But What Does a Business Model Have to Do With My Startup? Your startup is essentially an organization built to search for a repeatable and scalable business model. As a founder you start out with:
1) a vision of a product with a set of features,
2) a series of hypotheses about all the pieces of the business model: Who are the customers/users? What’s the distribution channel. How do we price and position the product? How do we create end user demand? Who are our partners? Where/how do we build the product? How do we finance the company, etc.
Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don’t behave as you predicted.
How Does Customer Development, Agile Development and Lean Startups Fit? The Customer Development process is the way startups quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. A Lean Startup is Eric Ries’s description of the intersection of Customer Development, Agile Development and if available, open platforms and open source. (This methodology does for startups what the Toyota Lean Production System did for cars.)
Business Plan Versus Business Model Wait a minute, isn’t the Business Model the same thing as my Business Plan? Sort of…but better. A business plan is useful place for you to collect your hypotheses about your business, sales, marketing, customers, market size, etc. (Your investors make you write one, but they never read it.) A Business Model is how all the pieces in your business plan interconnect.
The Pivot How do you know your business model is the right one? When revenue, users, traffic, etc., start increasing in a repeatable way you predicted and make your investors happy. The irony is the first time this happens, you may not have found your company’s optimal model. Most startups change their business model at least once if not several times. How do you know when reached the one to scale?
Stay tuned. More in future posts.
Lessons Learned
A startup is an organization formed to search for a repeatable and scalable business model.
The goal of your early business model can be revenue, or profits, or users, or click-throughs – whatever you and your investors have agreed upon.
Customer and Agile Development is the way for startups to quickly iterate and test their hypotheses about their business model
Most startups change their business model multiple times.
…I’ve been to the mountaintop and I’ve seen the Promised Land. And I might not get there with you… Martin Luther King
The startup founder who gets fired just as his/her company is growing into large company could be a cliché – if it wasn’t so true – and painful.
Let’s take a look at why.
Full disclosure: I’ve worn all the hats in this post. I’ve been the founder who got fired, I’ve been on the board as my friends got fired and I’ve been the board member who fired the founders.
Scalable Startups at Adolescence In our previous post we posited that Scalable Startups are designed to become large companies. Yet at their early stages, they are not small versions of larger established companies. They are different in every possible way – people, culture, goals, etc. Scalable startups go through an transitional form, as unique as a startup or large company, before they can grow into a large company
Management in the Transition When Startups reach the Transition stage, it’s time to look inward and decide whether the current CEO and executive staff are capable of scaling to a large company.
To get to this Transition stage, the company needed passionate visionaries who can articulate a compelling vision, agile enough to learn and discover in real time, resilient enough to deal with countless failures, and responsive enough to capitalize on what they learned in order to secure early customers. The good news is this team found a business model, product/market fit and a repeatable sales model.
What lies ahead, however, is a different set of challenges: finding the new set of mainstream customers on the other side of the chasm and managing the sales growth curve. These new challenges require a different set of management and leadership skills. Critical for this transition are a CEO and executive staff who are clear-eyed pragmatists, capable of crafting and articulating a coherent mission for the company and distributing authority down to departments that are all driving toward the same goal.
What’s Next By now, the board has a good sense of the skill set of the CEO and executive team as entrepreneurs. What makes the current evaluation hard is that is based not on an assessment of what they have done, but on a forecast of what they are capable of becoming. This is the irony of successful entrepreneurial executives: their very success may predicate their own demise.
The table below helps elucidate some of the characteristics of entrepreneurial executives by stage of the company. One of the most striking attributes of founders is their individual contribution to the company, be it in sales or product development. As technical or business visionaries, they are leaders by the dint of their personal achievements. As the company grows, however, it needs less of an iconoclastic superstar and more of a leader who is mission- and goal-driven.
Leaders at this Transition stage must be comfortable driving the company goals down the organization and building and encouraging mission-oriented leadership on the departmental level. This Transition stage also needs less of a 24/7 commitment from its CEO and more of an as-needed time commitment to prevent burnout.
Planning is another key distinction. The Scalable Startup stage called for opportunistic and agile leadership. As the company gets bigger, it needs leaders who can keep a larger team focused on a single-minded mission. In this mission-centric Transition stage, hierarchy is added, but responsibility and decision making become more widely distributed as the span of control gets broader than one individual can manage. Keeping this larger organization agile and responsive is a hallmark of mission-oriented management.
I Don’t Get It – I Built This Company – I Deserve to Run It
This shift from Customer and Agile Development teams to mission-centric organization may be beyond the scope and/or understanding of a first-time CEO and team. Some never make the transition from visionary autocrats to leaders. Others understand the need for a transition and adapt accordingly. It’s up to the board to decide which group the current executive team falls into.
This assessment involves a careful consideration of the risks and rewards of abandoning the founders. Looking at the abrupt change in skills needed in the transition from Customer Development to a mission-centric organization to process-driven growth and execution, it’s tempting for a board to say: Maybe it’s time to get more experienced executives. If the founders and early executives leave, that’s OK; we don’t need them anymore. The learning and discovery phase is over. Founders are too individualistic and cantankerous, and the company would be much easier to run and calmer without them. All of this is often true. It’s particularly true in a company in an existing market, where the gap between early customers and the mainstream market is nonexistent, and execution and process are paramount. A founding CEO who wants to chase new markets rather than reap the rewards of the existing one is the bane of investors, and an unwitting candidate for unemployment.
Don’t Fire the Founders Nevertheless, the jury is still out on whether more startups fail in the long run from getting the founders completely out of the company or from keeping founders in place too long. In some startups (technology startups especially), product life cycles are painfully short. Regardless of whether a company is in a new market, an existing market, or a resegmented market, the one certainty is that within three years the company will be faced with a competitive challenge. The challenge may come from small competitors grown bigger, from large companies that now find the market big enough to enter, or from an underlying shift in core technology. Facing these new competitive threats requires all the resourceful, creative, and entrepreneurial skills the company needed as a startup.
Time after time, startups that have grown into adolescence stumble and succumb to voracious competitors large and small because they have lost the corporate DNA for innovation and learning and discovery. The reason? The new management team brought in to build the company into a profitable business could not see the value of founders who kept talking about the next new thing and could not adapt to a process-driven organization. So they tossed them out and paid the price later.
Take the Money and Let Someone Else Sort it Out
In an overheated economic climate, where investors could get their investments liquid early via a public offering, merger or acquisition, none of this was their concern. Investors could take a short-term view of the company and reap their profit by selling their stake in the company long before the next crisis of innovation occurred. However, in an economy where startups need to build for lasting value, boards and investors may want to consider the consequences of losing the founder instead of finding a productive home to hibernate the creative talent for the competitive storm that is bound to come.
Instead of viewing the management choices in a startup as binary—entrepreneur-driven on Monday, dressed up in suits and processes on Tuesday—the Transition stage and mission-oriented leadership offers a middle path that can extend the life of the initial management team, focus the company on its immediate objectives, and build sufficient momentum to cross the chasm. We’ll cover the details in a future post.
Lessons Learned
Founder/Investor struggles about leadership are not about past successes – they’re about who’s best to lead future growth
Founder success in the Startup stage is not a predictor for success in the next stages
Few founders make great large company execs
The exceptions, Gates, Jobs, Ellison, etc. are founders who grew into large company executives while retaining founder instincts
This post is the latest in the “Secret History Series.” They’ll make much more sense if you read some of the earlier ones for context. See the Secret Historyvideo and slides as well as the bibliography for sources and supplemental reading.
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The Soviet Union’s detonation of an atomic weapon in 1949 and the start of the Korean War in 1950 fed cold war paranoia in the military and political leadership of the United States. The U.S. intelligence community was determined to find out what was going on inside the Soviet Union. But Soviet secrecy had the country locked down tightly. Desperate for intelligence, the CIA would fly the Lockheed built U-2 spy plane into and over the Soviet Union on 24 missions from 1956-1960 taking photos of its military installations.
But even as the U-2 was beginning its overflights, the U.S. military had concluded that the future of intelligence over the Soviet Union would no longer be with airplanes, but would rely instead on spy satellites orbiting hundreds of miles above in space.
One company in what is today Silicon Valley would build most of them.
WeaponsSystem 117L In 1956 Lockheed Missiles had just won the contract to build the Polaris Submarine Launched Ballistic Missile (SLBM) for the U.S. Navy in Sunnyvale California, and down in Los Angeles, the U.S. Air Force was on a “crash program” to build land-based Intercontinental Ballistic Missiles (ICBM’s) – the Atlas, Titan and Minuteman.
In 1954, three years before the U.S. or the Soviet Union ever orbited a single satellite, the Air Force asked the RAND corporation to study what satellites could do for the military. Their answer: satellites would enable us to peer over the closed border and inside the Soviet Union. In 1956, the Air Force organization building our ICBMs was assigned to build a family of satellites to spy on the Soviet Union from space. These satellites would be configured to carry out different reconnaissance missions, including photo reconnaissance, infrared missile warning, and Electronic Intelligence.
This military spy satellite program was called Weapons System 117L.
Spies in Sunnyvale In 1956 the Air Force gave Lockheed Missiles Division in Sunnyvale the contract to build Weapons System 117L.
Over the next two years Weapons System 117L evolved into a large ambitious program with multiple satellites:
The Satellite and Missile Observation System (SAMOS) would take low resolution pictures of the Soviet Union from space and transmit the photos electronically to earth.
Another SAMOS version (called Ferrets) would collect electronic intelligence on Soviet radars and transmit the location and radar details electronically to earth.
The Missile Detection Alarm System (MIDAS) would provide early warning of the launch of Soviet missiles heading to the U.S. by looking for the hot exhaust (the infrared plume) of rocket engines and transmit the location of the launch electronically to earth.
Crisis In 1957, a year after Lockheed got the contract to start building WS-117L, the Soviet Union tested an ICBM – one that could carry a nuclear warhead to the United States. They quickly followed with the launch of Sputnik, the first earth-orbiting satellite.
These two events jolted the U.S. intelligence agencies into crisis mode. The Soviet Union claimed they could turn out ICBMs like sausages, and the CIA desperately needed to know how many missiles the Soviets really had and where they were.
Not Good Enough The photo reconnaissance satellite designed for Weapons System-117 would have let the U.S. military see objects larger than 100-feet from space. This 100-foot resolution was sufficient for its original mission – to assess how effective the first wave of nuclear attacks on the Soviet Union had been. This “post-strike bomb damage assessment” would allow targets that had been missed by the nuclear armed SAC bombers to be retargeted for follow-on attacks. Because of the immediacy of the information, it required real-time electronic read-out of film developed on orbit.
The problem was that while 100-foot resolution was good enough to locate craters left in cities from space, it wasn’t sufficient for the new mission; to locate the new Soviet ICBM silos and bombers. In addition, the electronic read-out of film developed on orbit was nowhere near ready; it was too complex for its time and technology.
The CIA and Corona The CIA convinced the Secretary of Defense that the best bet was to build a separate photo reconnaissance satellite carrying a camera that took pictures from space as it passed over the Soviet Union. Film from the camera would be de-orbited in a capsule that could survive the heat of re-entry from space. A parachute would slow the descent of the capsule, which would be snatched in mid-air over the Pacific Ocean by a recovery plane hooking its parachute. The idea was that this film-based spy satellite would be a short-term project until the Lockheed electronic readout version was in better shape.
This Project was code-named Corona.
The Flamingo Motel In March 1958 a few unassuming guests checked into the Flamingo Motel in San Mateo, California, near the San Francisco airport. The CIA, and their primary contractors Lockheed, Kodak, Fairchild and GE, met to hash out their roles and the schedule. The CIA was the customer. Lockheed would integrate and assemble the satellites, Itek (which replaced Fairchild) would provide the camera, Kodak the film, and GE would provide the recovery system that would bring the exposed film through the fiery re-entry back to earth.
After the meeting, the Lockheed manager for Corona rented his own hotel room in Rickey’s Hyatt House in Palo Alto to start to plan the program. He needed to find a factory, separate from the already secret Polaris factory in Sunnyvale. He found an unused facility at the Hiller Helicopter factory on Willow Road in East Palo Alto which became the Lockheed “Advanced Projects” facility.
Deception To hide the fact that we were launching high-resolution photo reconnaissance satellites over the Soviet Union, the CIA had the Air Force publically cancel the SAMOS photo reconnaissance portion of WS-117L. The program then was resurrected as a “deep black” “compartmentalized” CIA program. When the Corona satellites were launched the CIA used a “cover” story. They called the Corona satellites the “Discoverer” program and claimed it was an experimental program to develop and test satellite subsystems and explore environmental conditions in space. The film recovery capsule was described as a “biomedical capsule” for the recovery of biological specimens sent into space as an early test of how humans would react to manned spaceflight.
East Palo Alto – Lockheed’s Satellite Factory The Corona project was run like a startup – a small team, minimum bureaucracy, focussed on a goal and tightly integrated with customer needs. Starting in February 1959, only 12 months after the program began the Air Force launched the first Corona reconnaissance satellite from the military’s secret spaceport on the California coast at Vandenberg Air Force Base. But the first 13 missions were failures. Yet the program was deemed so important to national security the CIA and the Air Force persevered. And when the first images were received they transformed technical intelligence forever. Objects as small as 6 feet (some claim 3 feet) could be seen from space over millions of miles of a formally closed country.
Corona Image of Stepnogorsk Bioweapons Facility
Over the life of the program there were 145 Corona launches – 120 were complete or partial successes. During that same decade the Corona program evolved into six different satellite models (the KH-1 thru KH-6) with three different intelligence objectives.
Lockheed turned the Hiller Helicopter plant in East Palo Alto into the control facility for all spy satellites and the Corona spy satellite assembly line – building about one a month and delivering ~145 Corona satellites over the life of the program.
Stanford, Jasons, WS-117L and Corona
In addition to Lockheed, Stanford University also had a hand in Corona. Sidney Drell, then a professor in the Stanford Physics department, was one of the dozen of young scientists who were founding members of the Jason Group (scientists working on national security problems.) His first project was understanding whether a Soviet nuclear burst in space could blind the infrared sensors on the Midas portion of WS-117L. This research got him invited to be part of the President’s Scientific Advisory Council (PSAC). But it was when the CIA asked him to solve some technical problems with the film on the Corona spacecraft that his career became intertwined with photo reconnaissance. His studies convinced the CIA that photo interpreters needed an order of magnitude improvement in resolution, and Corona had been pushed to its limits. In the late 1960′s Drell, as a member of the Land Panel convinced the CIA that the next generation of photo reconnaissance satellites should transmit their images back to earth in real-time, and use CCD’s rather than film.
Corona Firsts While Corona had a number of technological breakthroughs, including the first photoreconnaissance satellite, the first recovery of an object from space, etc. it was Corona imagery in 1961 that told the intelligence community and the new Kennedy administration that the “missile gap” (the supposed Soviet lead in ICBMs) was illusory. By fall of 1961 Soviet Union had a total of six deployed ICBMs – we had ten times as many. In truth, it was the U.S. that had the lead in missiles.
Corona was just the beginning. Overhead reconnaissance would become an integral part of the U.S. intelligence community. Hidden in plain sight, Lockheed and the U.S. intelligence community were just getting started in Silicon Valley.
A journey of a thousand miles begins with a single step. Lao-tzu
If you read the academic literature or business press, you might believe that large companies and their business models are brought by the stork.
This series of posts are going to offer a new three-stage model of how startups grow into large companies. And I’ll end with some thoughts about a new approach to entrepreneurial education using this model.
Children, Adolescents and Adults In the Middle Ages children were considered to be smaller versions of adults. We now know that the human life cycle is more complex; children aren’t just small adults, and adolescents are not simply large children. Instead each is a unique stage of development with distinctive behavior, modes of thinking, physiology and more.
The same is true for startups and companies.
In the past, most business literature has treated the life cycle of corporation as if the practices that make sense for a large corporation were equally appropriate for a startup. They only differed by timing or scale.
I argue that as a scalable startup grows from a garage into a Google, it progresses through three distinct stages – each presenting a unique set of challenges and decisions – and each requiring vastly different resources, skills and strategy.
Let’s take a closer look at the first two of these stages.
Stage 1: The Scalable Startup A scalable startup is designed by intent from day one to become a large company. The founders believe they have a big idea – one that can grow to $100 million or more in annual revenue—by either disrupting an existing market and taking customers from existing companies or creating a new market. Scalable startups aim to provide an obscene return to their founders and investors using all available outside resources.
Entrepreneurs who have run a startup know that startups are not small versions of big companies. Rather they are different in every possible way – from goals, to measurements, from employees to culture. Very few skills, process, people or strategies that work in a startup are successful in a large established company and vice versa because a startup is a different organizational entity than a large established company.
Therefore, it follows that:
a) Startups need different management principles, people and strategies than large established companies
b) Any advice that’s targeted to large established companies is irrelevant, distracting and potentially damaging in growing and managing a startup
Getting From Here to There If you would ask a startup CEO to create a diagram showing how their startup will become a large company, you’d probably get a simple line extending from “here’s where we are” to “here’s where we’re going.”
All the activities of a scalable startup such as Customer Development, Agile Development, Pivots, search for a repeatability, scale, business model, team building etc. would be inside the box to the left. In this simplistic model, on the day a startup achieves product/market fit, they would stop doing all the startup activities and magically become a “large company” – somehow acquiring a completely new set of skills, executing a known business model, generating profits and achieving liquidity for its founders and investors.
Since we know the world doesn’t work like this, the question is, “what is the process that transforms a a startup into a large company?”
Stage 2: Metamorphosis – the Transition
Any entrepreneur who has been successful (lucky) enough to grow their startup into a large company knows that this process is not a simple linear transition – it’s a metamorphosis. Startups traverse a clearly defined and chaotic stage before they become a large enterprise.
And once again, very few skills, processes, people or strategies that work in a scalable startup or in a large established company are successful in this transitional stage.
The transitional period between a startup and a company is a different organizational entity than either a startup or a large enterprise. While it is no longer an early stage scalable startup, it is not yet a large company.
Summary
The new taxonomy for understanding how startups differ and grow into large company’s looks like this:
Each stage is an entirely different business entity with different management needs and requirements. In the next few posts I will explore how they differ in:
Management
Culture
Sales
Marketing
Strategy
Then I’ll propose why this three step model calls for a new approach to entrepreneurial education—Durant School of Entrepreneurship™.
Sometimes what sounds like bad news when talking to customers might be your finest hour.
Hypothesis Testing As we started E.piphany, we got out of the building to test our hypotheses by talking to potential customers in and around Silicon Valley. On one of our most memorable visits, we met with Joe DiNucci, the VP of Marketing at Silicon Graphics who was generous enough to brainstorm the types of problems corporate marketers had. At the time Silicon Graphics – with 2+ billion dollars in sales of 3d workstations – was one of the hottest hardware companies in Silicon Valley.
The conversation seemed to click as he checked off every one of the issues we thought might define our product: no closed-loop between expensive marketing activities and results, lack of department and corporate wide visibility to real-time sales and marketing data, browser versus client-server application, etc. We came up with a rough estimate of how much Silicon Graphics could save if they had a way to solve these problems, and together did a back of the napkin ROI (Return on Investment) analysis. Next we started enumerating what form a solution might take and what kind of features a product should have. Amazingly we came up with a feature list that was pretty close to the one we were building. I was feeling like a genius so I went to the next step and I asked Joe: “It sounds like Silicon Graphics might be interested in working with us to be an early customer?”
My Bubble Burst The answer was not what I expected. “No not at all.” Say, what? Why? “We also decided that this was an important problem to solve, and since we couldn’t find any vendor selling it, my director of marketing wrote the software to do it. We’ve built and deployed the product throughout Silicon Graphics. It’s called Mine Your Own Business.”
Talk about feeling your bubble deflate fast. I went from feeling the high of believing that I might have an early customer in an innovative company to the low in realizing that they’d never buy anything from us. And worse, what we had envisioned as a product so unique that no one had thought of it, someone had already built. We wouldn’t be the first. We were doomed.
I left Silicon Graphics feelings discouraged. But on the drive back to E.piphany a few things hit me.
A credible customer told me that we had hit on a high-value problem
They couldn’t find commercial software to solve this problem.
It was an important enough problem that they invested effort to write their own software.
It had been deployed inside their company and there were real world users
I could now point potential investors and visionary customers to the widespread use of the product inside SGI as a proxy for our product
The more I thought about it, the better I felt. This was a validation of our ideas not a negation.
Take No Prisoners The next day I called the VP of Marketing back and asked him if I could get a demo of their software. Soon I was in the office of John McCaskey, the director of Silicon Graphics Science Industry Marketing who wrote Mine Your Own Business. As he went through the demo, I realized I was looking at working code for a big part of what we had spec’d as our first release.
I told John he ought to join our startup. “How many of you are there?” he asked. “Three, I said. “Including me. Four if we count you.” John rolled his eyes and tried to change the subject. I said, “We’re three now, but if we do this right we could be selling $100 million dollars a year of your software. Wouldn’t you rather be doing that than working at a big company?” That got his attention. “Well who’s funding you?” My turn to pause, “Well no one yet, but every VC thinks it’s a great idea.”
Watching someone rolling their eyes twice is not a good sign you’re going to close the deal, so I grabbed the phone and called Bill Davidow, a legendary VC whose office I had just left. “Bill, do me a favor,” I asked, “Can you tell this guy how big the enterprise software market can get?” I don’t know who was more surprised, Bill Davidow in getting a call from me (since he had just told me he wasn’t going to invest in our new company – his firm having funding Rocket Science, the previous company I had just cratered) or John having watched me get the VC on the phone on the first ring (pure and unadulterated luck.) Bill was kind enough to spend a couple of minutes educating John about the opportunities for a startup like ours, and enough of a gentleman not to mention he had passed on our deal.
Thirty days later John became the fourth co-founder of E.piphany.
Sixty days later we convinced Silicon Graphics to license us all of John’s code for a dollar. (During the craziness of the Internet bubble E.piphany’s market cap would be greater than Silicon Graphics.)
John’s boss, Joe DiNucci, the VP of Marketing of Silicon Graphics became E.piphany’s VP of Sales.
Lessons Learned
Finding that a potential customer wrote their own software (or hardware) to solve a problem is good news, not bad
It’s a strong sign that there’s a high-value problem
The Future is Clear – Microwave Valley Forever In 1956 Hewlett Packard, back then a maker of test equipment was the valley’s largest electronics employer with 900 employees. But startups were rapidly spinning out of Stanford’s Applied Electronics Lab delivering microwave tubes, components and complete electronic intelligence and electronic warfare systems for the U.S. military and intelligence agencies. The future of the valley was clear – microwaves.
1956 – Change Everything In 1956 two events would change everything. At the time neither appeared earthshaking or momentous. Shockley Semiconductor Laboratory, the first semiconductor company in the valley, set up shop in Mountain View. And down the street, Lockheed Missiles Systems Division which would become the valley’s most important startup for the next 20 years, moves its new missile division from Burbank to 275 acres next to the Moffett Naval Air Station in Sunnyvale.
Lockheed – Building Nuclear Missiles in Sunnyvale Lockheed, an airplane manufacturer,was getting into the missile business by becoming the prime contractor to build the Polaris, a submarine launched ballistic missile (SLBM) developed by the Navy. The Polaris was unique: it would be the first solid-fuel ballistic missile used by the U.S. Solid fuel solved the safety problem of carrying missiles at sea and underwater and also allowed for instant launch capability. Polaris launched SLBM’s would become the third part of the nuclear triad the U.S. built in the cold war – the Polaris, the B-52 manned bomber, and the Minuteman, and Titan land-based Intercontinental Ballistic Missiles (ICBMs.)
Each Polaris missile carried a 600 kT nuclear warhead, (later Polaris versions carried three) and each ballistic missile submarine carried 16 of these missiles. 10 years after the program started the United States had built and put to sea 41 ballistic missile submarines carrying 656 Lockheed missiles (28.5 ft high, and weighing 29,000 lbs.) The company acquired a 5,000 acre missile test facility near Santa Cruz, and for years would test it’s missiles in the mountains above the valley.
One can assume that with spares, Lockheed built close to 1000 of these missiles in those ten years. That’s 100 missiles a year, 8/month or 2 a week flying out of Moffett Field.
You Can Be Sure if It’s Westinghouse Polaris submarines carried each missile in a separate launch tube. Down the street from Lockheed in Sunnyvale, another American corporate icon, Westinghouse became the developer of the launch tube for the Polaris missile. To launch missiles from a submarine under water, Westinghouse had to solve several problems. The launch tube had to keep the missile snug in its tube until firing. It had to eject the missile with sufficient velocity so it would head to the surface for a 100’ feet under water, and it had to protect the submarine when ocean water came rushing in to the now empty launch tube. Oil-filled shock absorbers solved the cushioning problem and compressed air launched the missile out of the tube through a thin diaphragm that separated the missile from the ocean once the missile launch covers were opened.
Zero to 28,000 people – We Become “Defense Valley” By 1965 Hewlett Packard, the test and instrumentation company, had grown ten-fold. From 900 people in 1956 it now employed 9,000. Clearly it must have been the dominant company in the valley? Or perhaps it was Fairchild, the direct descendant of Shockley Semiconductor, now the dominant semiconductor supplier in the valley (80% of its first years business coming from military systems) with ~10,000 people?
Nope, it was the Lockheed Missiles Division, which had zero employees in 1956, now in 1965 had 28,000 employees in Sunnyvale. The best and the brightest were coming from across the country to the valley south of San Francisco.
And they were not only building Polaris missiles.
By 1965 Lockheed factories in Sunnyvale, Stanford and East Palo Alto were building the most secret spy satellites and rockets you never heard of. While the 1950′s had made us “Microwave Valley,” the growth of Lockheed, Westinghouse and their suppliers had turned us into “Defense Valley.”
In the next post; Spy Satellites in East Palo Alto and Stanford – Corona, WS-117, Samos, Ferret’s and Agena.
Make no little plans. They have no magic to stir men’s blood… Daniel Burnham
A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business. How can you tell if your startup has the potential to be the next Google, Intel or Facebook? A first order filter is whether the founders are aiming for a scalable startup.
Go For Broke A few years ago I sat on the board of IMVU when the young company faced a choice my mother used to describe as “you should be so lucky to have this problem.” For its first year IMVU had funded itself with money from friends and family. Now with customers and early revenue, it was out raising its first round of venture money. (Not only did their sales curve look like a textbook case of a VC-friendly hockey stick, but their Lessons Learnedfunding presentation was an eye-opener.)
Staring at us in the board meeting were three term-sheets from brand name VC’s and an unexpected buy-out offer from Google. In fact, Google’s offer for $15 Million was equal to the highest valuation from the venture firms. The question was: what did the founders want to do?
Will Harvey, Eric Ries and the other founders were unequivocal – “Screw the buy-out, we’re here to build a company. Lets take venture capital and grow this thing into a real business.”
The Scalable Startup Will and Eric implicitly had already made six decisions that defined a scalable startup.
Their vision for IMVU was broad and deep and very big – 3D avatars and virtual goods would eventually be everywhere in the on-line world. They wanted to build an industry not just a product or a company.
Their personal goal wasn’t to have a company that stayed small and paid them well. Nor did they think flipping the company to make a few million dollars would be a win. They believed their vision and work was going to be worth a lot more – or zero.
They envisioned that their tiny startup was to going to be a $100 million/year company by creating an entirely new market – selling virtual goods.
They used Customer and Agile development to search for a scalable and repeatable business model to become a large company. It reduced risk while allowing them to aim high.
They fervently believed that only they were the ones who could and would make this happen.
These decisions guaranteed that the outcome of the board meeting was preordained. Selling out to Google would mean that someone else would define their vision. They were too driven and focused to let that happen. A few million dollars wasn’t their goal. Taking venture money was just a means to an end. Their goal was to get profitable and big. And risk capital allowed them to do that sooner than later. Venture money also meant that the VC’s goals of obscene returns were aligned with the founders. For the entire team, turning down the Google deal was equivalent to burning the boats on the shore. (One founder quit and joined Google.) After that, there was no doubt to existing employees and new hires what the company was aiming for.
Take No Prisoners A “scalable startup” takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly.
A scalable startup typically requires external “risk” capital to create market demand and scale. And the founders must have a reality distortion field to convince investors their vision is not a hallucination and to hire employees and acquire early customers. A scalable startup requires incredibly talented people taking unreasonable risks with an unreasonable effort from the founders and employees.
Not All Startups are Scalable The word entrepreneur covers a lot of ground. Itmeans someone who organizes, manages, and assumes the risks of a business. Entrepreneurship often describes a small business whose owner starts up a company i.e. a plumbing supply store, a restaurant, a consulting firm. In the U.S. 5.7 million companies with fewer than 100 employees make up 99.5% of all businesses. These small businessesare the backbone of American capitalism. But small businesses startups have very different objectives than scalable startups.
First, their goal is not scale on an industry level. They may want to grower larger, but they aren’t focused on replacing an incumbent in an existing market or creating a new market. Typically the size of their opportunity and company doesn’t lend itself to attracting venture capital. They grow their business via profits or traditional bank financing. Their primary goal is a predictable revenue stream for the owner, with reasonable risk and reasonable effort and without the need to bring in world-class engineers and managers.
The Web and Startups The Internet has created a series of new and innovative business models. Herein lies the confusion; not every business on the web can scale big. While the Internet has enabled scalable Internet startups like Google and Facebook, it has also created a much, much larger class of web-based small businesses that can’t or won’t scale to a large company. Some are in small markets, some are run by founders who don’t want to scale or can’t raise the capital, or acquire the team. (The good news is that there is an emerging class of investors who are more than happy to fund and flip Web small businesses.)
Scalable Startup or Small Business – Which One is Right? There’s nothing wrong with starting a small business. In fact, it is scalable startups that are the abnormal condition. You have to be crazy to make the bet the IMVU founders did. Unfortunately the popular culture and press have made scalable startups like Google and Facebook the models that every entrepreneur should aspire to and disparages technology small businesses with pejoratives like “lifestyle business.”
That’s just plain wrong. It’s simply a choice.
Just make it a conscious choice.
Lessons Learned
Not all startups are scalable startups
6 initial conditions differentiate a scalable startup from a small business;
Breadth of an entrepreneurs’ vision
Founders’ personal goals
Size of the target market
Customer and Agile development to find the business model
World-class founding team and initial employees
Passionate belief and a reality distortion field
Understand your personal risk profile/ don’t try to be someone you’re not
No posts until January. Time off for the holidays, out hiking at the ranch and getting ready for Stanford (E-145 and MS&E 178/278) and Berkeley (MBA 295) classes.
I’m sitting next to the fireplace in my favorite chair listening to holiday music, looking at the ocean and making occasional attempts to “help” get ready for Christmas dinner. We went for a hike checking out our new trail signs and playing “spot the bobcat.” Our kids are home for the school break, some friends are visiting from the east coast and we have everything for the holidays but snow on the California coast.
My kids are now almost the age I was long ago at another Christmas.
So This is Christmas As a 20-year old in Thailand in the middle of the chaos of the Vietnam War, my days were filled being a infinitesimal part of the synchronized machinery of maintaining, arming, and launching row after row of fighter planes parked in their revetments –
F-105 Wild Weasels, F-4’s, A-7’s, as well AC-130 Spectre gunships.
There was something both awe-inspiring and incongruous watching fighter planes with bombs on the wing racks take off two at a time. They would accelerate down the runway with full afterburners with sound you could feel in your chest, climb steeply banking sharply to avoid the towering thunderstorms and seem to fly through double rainbows so bright and beautiful they looked painted on the sky.
While I spent most of my time in an air-conditioned avionics shop, my forays out to the flight-line forever made the smell of JP-4 (jet fuel) an integral part of my life. I still associate the kerosene odor with the ballet-like choreography and precision of hundreds of bomb loaders, pod loaders, start-carts, maintenance crews and the cacophonous sound of dozens of jet engines and fighters purposefully taxiing to the runway. As I look out of the window from a seat of a commercial airplane and see the fuel trucks and baggage carts scurry about, the smell of jet fuel still makes me remember somewhere else.
R&R Halfway through my tour of duty I got to go on vacation – what the military called R&R (rest and recreation.) All my buddies went to Bangkok or somewhere equally exotic. I decided to go to Ann Arbor Michigan to see my girlfriend. Normally you got 5 days off and then it was time to forget civilian life and get back to the war. Somehow (lost in the mist of time, or perhaps it was because my R&R would occur over the Christmas holidays) I managed to make my R&R 7 days.
One day I was in the middle of Thailand and the next I was hopping space-available military flights to snow-bound Michigan.
So This is Christmas To my girlfriend Christmas was the high point of her year. Getting off the plane I was in a jet-lagged daze, standing out with very short-hair in a ‘70’s college town, as she met me by at the gate reminding me that having me back was her best Christmas present. As soon as we left the airport we began a 7-day frenzy of a full-immersion Christmas. (All of this was new for me, as I was raised by a single mother who never celebrated holidays- secular or religious, including events like birthdays.)
I still remember some of the things we did; making wrapping paper by tie-dying plain tissue paper, baking Christmas cookies and Gingerbread men and fruitcake. We made our own Christmas ornaments. I even believe, given how little money we had, we made each other our presents. We went caroling in the snow and had Christmas dinner with friends.
Yet with all of that holiday activity the one thing I still remember, the one thing I can still feel after almost 40 years, was regardless of the adventures you have, how important coming home to a family was.
Of all the goals I set in my life coming home to a family was the one I set standing in the snow that Christmas.
Sometimes financial decisions that are seemingly rational on their face can precipitate mass exodus of your best engineers.
We Hired the CFO Last week as a favor to a friend, I sat in on a board meeting of a fairly successful 3½ year-old startup. Given all that could go wrong in this economy, they were doing well. Their business had just crossed cash flow breakeven, had grown past 50 employees, just raised a substantive follow-on round of financing and had recently hired a Chief Financial Officer. It was an impressive performance.
Then the new CFO got up to give her presentation – all kind of expected; Sarbanes Oxley compliance, a new accounting system, beef up IT and security, Section 409A (valuation) compliance, etc. Then she dropped the other shoe.
“Do you know how much our company is spending on free sodas and snacks?” And to answer her own question she presented the spreadsheet totaling it all up.
There were some experienced VC’s in the room and I was waiting for them to “educate” her about startup culture. But my jaw dropped when the board agreed that the “free stuff” had to go.
“We’re too big for that now” was the shared opinion. But we’ll sell them soda “cheap.”
Unintended Consequences I had lived through this same conversation four times in my career, and each time it ended as an example of unintended consequences. No one on the board or the executive staff was trying to be stupid. But to save $10,000 or so, they unintentionally launched an exodus of their best engineers.
This company had grown from the founders, who hired an early team of superstars, many now managing their own teams. All these engineers were still heads-down, working their tails off, just as they had been doing since the first few months of the company. Too busy working, most were oblivious to the changes that success and growth had brought to the company.
The Elves Leave Middle Earth – Sodas Are No Longer Free One day the engineering team was clustered in the snack room looking at the soda machine. The sign said, “Soda now 50 cents.” The uproar began. Engineers started complaining about the price of the soda. Someone noticed that instead of the informal reimbursement system for dinners when they were working late, there was now a formal expense report system. Some had already been irritated when “professional” managers had been hired over their teams with reportedly more stock than the early engineers had. Lots of email was exchanged about “how things were changing for the worse.” A few engineers went to the see the CEO.
But the damage had been done. The most talented and senior engineers looked up from their desks and noticed the company was no longer the one they loved. It had changed. And not in a way they were happy with.
The best engineers quietly put the word out that they were available, and in less than month the best and the brightest began to drift away.
What Happened? Startups go through a metamorphosis as they become larger companies. They go from organizations built to learn, discover and iterate, to predominately one that can execute adroitly having found product/market fit.
Humans seem to be hard-wired for numbers of social relationships. These same numbers also define boundaries in growing an organization – get bigger than a certain size and you need a different management system. The military has recognized this for thousands of years as they built command and control hierarchies that matched these numbers.
Wake Up Call
The engineers focused on building product never noticed when the company had grown into something different than what they first joined.
The sodas were just the wake-up call.
As startups scale into a company, founders and the board need to realize that the most important transitions are not about systems, buildings or hardware. It’s about the company’s most valuable asset – its employees.
Great companies do this well.
Lessons Learned
Be careful of unintended consequences when you grow
Recognize the transition boundaries in company size
Gathering real-world feedback from customers is a core concept of Customer Development as well as the Lean Startup. But what information to collect?
Only 57 Questions Yesterday I got an email from an ex-student lamenting that only 2% of their selected early testers responded to their on-line survey. The survey said in part:
The survey has 57 questions, the last three of which are open ended, and should take about 20 minutes to complete. Please note that you must complete the entire survey once you begin. You cannot stop along the way and have your responses to that point saved.
If it wasn’t so sad it would be funny. I called the founder and noted that there are SAT tests that are shorter than the survey. When I asked him if he actually had personally left the building and talked to these potential customers, or even had gotten them on the phone, he sounded confused. “We’re a web startup, all our customers are on the web. Why can’t I just get them to give me the answers I need this way?”
Continual Data Flow Customer Development suggests that founders have continual and timely customer, channel and market information.
Founders need three views of information to truly understand what is going on:
The view from the eyes of customers and competitors
First-hand knowledge First-hand knowledge is “getting outside the building” and talking to potential or actual customers. Customer Development proposes that the best way to get customer data is through personal observation and experience—getting out from behind your desk and getting up close and personal with customers, competitors, and the market.
Web startups are at real disadvantage here as founders may confuse web metrics, A/B testing and on-line surveys as the entirety of first-hand knowledge – for most web business modelsthey are not. In fact, this mistake can be a “going out of business” strategy. Metrics tell you that something is happening. A/B testing can tell you that one something is better than another. But neither can tell you why. And getting answers back from customers only with on-line surveys when you can’t watch their pupils dilate or hear the intonation of their voice is not something I’d build a business on.
Of course you need to collect metrics, do A/B testing and run online surveys. It’s just that without having founders “get outside the building”, you are missing a key point of Customer Development – the numeric data you collect may be blinding you to the fact that you’re more than likely working to optimize the wrong business model. Customer needs are non-deterministic.
“Birds-eye view” The second picture founders need is a synthesized “birds-eye view” of the customer, market and competitive environment. You assemble this view by gathering information from a variety of sources: web sites, social media (Facebook, Twitter, blogs, et al) sales data, win/loss information, market research data (i.e. compete.com, Alexa, etc.,) competitive analyses, and so on. From this big-picture view, founders try to make sense of the shape of the market and the overall patterns in the unfolding competitive and customer situation. At the same time, they can gauge how well industry data and the actual sales match the company’s revenue and market-share expectations.
(Just remember that most market research firms are excellent at predicting the past. If they could predict the future, they’d be entrepreneurs.)
My test for how well you understand this “order of battle” is to hand the founder a marker, have them go up to the whiteboard and diagram the players in the market and where they fit. (Try it.)
See through the eyes of customers and competitors The third view is of the action as seen through the eyes of customers and competitors. Put yourself in your customers’ and competitors’ shoes in order to deduce possible competitors’ moves and anticipate customer needs. In an existing market this is where you ask yourself, “If I were my own competitor and had its resources, what would my next move be?” In looking through the eyes of a customer, the question might be, “Why should I buy from this company versus the incumbent.” In a new or resegmented market, the questions might be “Why would more than a few early adopters use this app, web site or buy this product? How would I get my 90-year grandmother to understand and buy this product?”
Think of this technique as playing chess. You need to be looking at all the likely moves from both sides of the chessboard. What would we do if we were our competitors? How would we react? What would we be planning? After a while this type of role playing will become an integral part of everyone’s thinking and planning.
Putting it All Together First-hand knowledge is clearly the most detailed and essential, but offers a narrow field of view. Founders who focus only on this information risk losing sight of the big picture.
The “birds-eye view” provides a view of the market but lacks the critical detail. Founders who focus only on this image risk missing the “ground truth.”
Seeing through the eyes of customers and competitors is a theoretical exercise limited by the fact that you can never be sure what your customers and competitors are up to.
The combination of all three views helps founders form an accurate picture of what is going on in their business and help them hone in on product/market fit.
Building an Information Culture The most important element of data gathering is what to do with the information once you collect it. Customer information dissemination is a cornerstone of Lean and agile companies. This information, whether good or bad, must not be guarded like some precious commodity. Large company cultures reward executives who hoard knowledge or suppress bad news. In any of my companies, that is a firing offense.
All news, but especially bad news, needs to be shared, dissected, understood, and acted upon.
This means that understanding poor click-through rates, retention numbers and sales losses are more important than understanding sales wins; understanding why a competitor’s products are better is more important than rationalizing ways in which yours is still superior. Winning startups build a startup culture that reward not punish messengers of bad news.
Lessons Learned
Three views of information: First-hand knowledge, “birds-eye” view, view from the eyes of customers and competitors
Web startups can fall into the trap of confusing metrics, testing and surveys with Customer Interaction.
Goal is to build an information culture to help you get to product/market fit.
The gist of the talk was that the needs of electronic intelligence in the midst of the Cold War and a single Stanford Professor was a key catalyst for entrepreneurship in Silicon Valley.
There were about 300 people in the audience, about 150 from the U.S. intelligence community.
There were about 300 people in the audience, almost all from the old Soviet Union.
I presented the same Secret History talk, pointing out that the launch of the first Soviet satellite (Sputnik) galvanized the U.S. government to accidentally contribute to the start the Venture Capital industry as we know it.
Afterwards a few of the audience came up and told me stories about Soviet weapons systems that could have won someone an intelligence medal 30 years earlier.
I would have loved to have given the talk to both audiences at the same time.
Early on in my career I took a “we’re moving too fast to deal with lawyers” attitude to patents and Intellectual Property (IP.) That changed when I joined the board of a startup, and we sued Microsoft and Sony on the same day for patent infringement – and won $120 million.
A few caveats, this post is not legal advice, it’s not even advice, and it deals with law in the United States. Outside the U.S. your results will vary depending on your distance to a consistent and predictable legal system.
At one of my entrepreneurship classes at Stanford, Dan Dorosin, of Fenwick & West LLP guest lectures about startups and Intellectual Property. Most of this post is from Dan’s lecture. (But there are no guarantees that I got it right.) It may seem full of legal definitions and terms but my two takeaways are: 1) Entrepreneurs need to know about these legal options, 2) Consulting an intellectual property attorney is a good move even before you get funded.
Intellectual Property Intellectual property gives you rights to stop others from using your creativity.
The assets you can protect may include your “core technology” like source code, hardware designs, architectures, processes, formulas. Or it can be your brand, logo or domain name. You can protect business processes, know how, customer information, product road map. Protection is also available for content such as music, books, or film.
For some of these assets, you get protection automatically. For other classes, to get full protection, you should/must go through a registration, application or examination process.
software, songs, movies, web site content
_____________
Trade Secrets
_____________
Secrets with economic value
(i.e. the Coke recipe)
_____________
non-public technology
customer lists, formula
_____________
Contract, NDA
_____________
As defined in the contract
_____________
technology, business information
_____________
Patent
Inventions
new technology
Trademark A trademark protects branding and marks, it gives you the right to prevent others from using “confusingly similar” marks and logos. Trademark protection lasts as long as you are using the mark. The more you use the mark, the stronger your protection. Trademark registration is optional, but has significant advantages if approved.
Copyright A copyright protects creative works of authorship; typically songs, books, movies, photos, etc. Copyright gives you the right to prevent others from copying, distributing or making derivatives of your work. It protects “expressions” of ideas but does not protect the underlying ideas. (If your product is software, copyright is also used to prevent someone from stealing your software and reselling it as machine and/or source code.) Copyright protection lasts practically forever. Registration is optional, but is required to sue for infringement.
Contract A contract is a binding legal agreement that is enforceable in a court of law. There’s no official registration process. You have whatever protection is defined in the contract (e.g., a Non Disclosure Agreement gives you certain rights to protection of your confidential information.) The protection lasts for the time period defined in the contract.
Patents A patent is a government granted monopoly to prevent others from making, using or selling your invention – even if the other parties infringement was innocent or accidental.
Just about anything can be patented: circuits, hardware, software, applied algorithms, formulas, designs, user interfaces, applications, systems. Scientific principles or pure mathematical algorithms cannot be patented.
Your invention must be “non-obvious.” The test for non-obvious is: given the prior art at the time of the invention, would a typical engineer 1) identify the problem, and 2) solve it with the invention? You must be “first” to patent. In the U.S. that means “first to invent” while outside U.S. it means “first to file.” You must file in U.S. within one year of sale, offer for sale, public disclosure or public use.
Your patent application has to include a written description with details of the claims of the invention. The details have to allow others to duplicate your invention from your description and has to the “best mode” in describing critical techniques/technologies. And it has to identify all prior art.
Patent protection lasts typically for 15-20 years. There is a formal application and examination process that’s required. Each patent filing will cost your company $10-30k and take 1-4 years. Filing of patents is frequently of major interest to people funding your company.
(There’s something called a “provisional patent.” It’s an alternative to a full patent. It allows you to claim “first to file” and use the term “patent pending.” Provisional patents get into the patent office quickly and cheaply. However they automatically expire after one year and no patent rights are granted. Provisional patents are a good placeholder because they are cheap to file and doesn’t get in the way of your other patent efforts.)
Key Idea #1 – Intellectual Property Creates Value Intellectual Propertyis an asset for you company. You need to acquire, protect and exploit it. An intellectual property strategy will map out:
Who are the key players and technologies in its market(s)?
What are the important patent applications that come next?
Key Idea #2 – Your Intellectual Property Needs Are Unique What type of intellectual property matters to your company, and what you should do to protect it is highly company/industry dependent, requiring unique analysis and/or protection. For example if you are a:
Medical device company – patents are key
Web 2.0/social network start up – trademark and copyright are more likely
Enterprise software company – copyright and trade secrets are probable
Biotech/phama – don’t even leave your bedroom until you have a patent counsel
Make sure you understand Intellectual Property for your specific industry.
Four Common Intellectual Property Mistakes by Start-Ups 1. Founders Didn’t Make Clean Break with Prior Employer Under California law, employers may own inventions that are “related to employer’s reasonably anticipated R&D.” It’s a very subjective standard, and since startups don’t often have resources or time to spend in lawsuits large companies use threats of litigation to ensure you don’t take anything. Therefore the best advice is “take only memories.” If you’re at a university, they may have patent policies that apply, too.
2. Your Company Cannot Clearly Show That it Owns its Intellectual Property Take the time to create a well documented, clear chain of title to your intellectual property. If you are using independent contractors make sure you have written agreements assigning work created. Make sure you have Employee Invention Assignment Agreements. (If you hire subcontractors or friends to do some work, get assignment agreements as well.)
3. Your Company Lost Patent Rights due to Filing Delays/Invention Disclosures In the U.S. patent rights are forfeited if you wait greater than 1 year after:
- Disclosure in a printed publication: Red flags: White paper, journal/conference article, Web site
- Offer for sale in the U.S.:Red flags: Start of sales effort, Price list, price quotation, Trade show demonstration, Any demonstration not under NDA
- Public use in the U.S.
In most foreign countries there is no one-year grace period.
4. Your Company Grants “Challenging” Licenses to Intellectual Property Startups acquiring their first customers may give special licensing terms in key markets, territories, etc. For example, a grant of “most favored nations” license terms or other licensee-favorable economic terms can make your intellectual property less valuable to future buyers of your company. Or you may cut a deal that you can’t assign or transfer (or can’t get out of) if you get acquired.
Lessons Learned
Protecting your startups intellectual property should be a strategy not an after the fact tactic.
You need a plan for trademarks, copyright, trade secrets, contracts/NDA’s and patents before you get funded.
Your intellectual property may be an additional revenue stream or may add substantial value to your company.
In my 21 years of startups, I had my ideas “stolen” twice. See part one for the first time it happened. This time it was serious.
As a reminder, this post is not legal advice, it’s not even advice. It’s just a story about what happened to me.
Customer Development We were starting Epiphany, my last company. I was out and about in Silicon Valley doing what I would now call Customer Discovery trying to understand how marketing departments in large corporations worked. The initial hypothesis for Epiphany (from my much smarter partner Ben) was that as departments in the enterprise (manufacturing, finance, customer support sales) became automated, the marketing department would eventually get its turn.
I remember presenting our ideas for Marketing Automation to one VP of Marketing in a large Silicon Valley company. His enthusiastic response was, “This will revolutionize marketing departments!” He continued: “I’d like to convince my boss so our company can be your first customer.” I should have been suspicious when he said, “I’d like to take a copy of your presentation to show him.” Caught up in the enthusiasm of hearing what a great idea we had, I violated one of my cardinal rules, and left him a hard copy.
Fast Forward Fast forward nine months. After talking to tons of customers and almost as many VC’s, we got Epiphany funded as a company that was going to automate Marketing Departments. After a ton of unreturned phone calls, I had written off the enthusiastic VP of Marketing who wanted to show my slides to his boss and moved on with building our company.
By now we had found a few customers and learned a lot more about the market from them and other prospects. Our business model changed as we realized that to become a large company, we needed to automate more than just a few marketers. As we were out looking for our Series B round, our company had gotten the attention of “name of big VC firm here” who wanted a play in enterprise software.
Are These Your Slides? During the due-diligence process, I sat down with one of the partners who pulled out a set of slides and asked me: ”Have you seen these?” I quickly leafed through them and replied, “Sure they’re our original slides. Why?” He said, “Look again.” They had all my words from a year ago, but hey wait a minute, there’s someone else’s logo on my slides?! What’s going on? He said, “That’s what we’re trying to figure out. These guys just got funded, and they sound a lot like you guys.” Luckily I had the original slides and could prove who came first. Still the fact was a competitor had raised money using our idea and our slide deck.
And who was this competitor? The VP of Marketing who a year earlier had wanted a hard copy of our slides. He was now CEO of a new company in our market.
I felt like I had just been kicked in the stomach.
Disbelief, Anger, Resignation and Acceptance My cofounders and I went through the stages of disbelief, anger, resignation and acceptance. Here was a competitor who had appropriated our idea and gotten funded. (Welcome to the Internet bubble.) There was lots of venting as we talked about lawsuits and issuing nasty press releases.
We consciously didn’t ask potential customers to sign a Non-Disclosure Agreement (NDA). In Customer Discovery we were learning as much from them as they did from us. And we figured that unless litigation was going to be our business strategy, NDA’s would have inhibited the back-and-forth that made us smarter. We concluded that, at least for us in this market, an NDA would be a bigger impediment than asset. Now we started asking ourselves, “Did we make a mistake? Would have getting a signed confidentially agreement deterred this person?” On further reflection, (and their track record since) not in the least. But that still left us with a problem. What should we do about this competitor copying our strategy?
Finally, we concluded, “You can’t drive forward by looking in the rear-view mirror.”
Our competitor was executing on hypotheses we had developed 9 months ago, and their strategy remained static. We on the other hand, had moved on. We had discovered detailed information about what customers really needed and wanted and turned our original hypotheses into facts. We had validated our new assumptions by a set of orders, and we had pivoted on our business model. Our original idea had been nothing more than an untested set of hypotheses. Truth be told, we were no longer the company in those stolen slides.
While the common wisdom said that our success was going to be determined by which company executed better, the common wisdom was wrong. In a startup success isn’t about just execution, it’s how well we could take our original hypothesis and learn, discover, iterateand execute.
Never Get Even, Get Ahead With a set of orders from brand name customers, we had growing confidence that we had achieved product/market fit. We were within three months of formally announcing our company and products at a major industry trade show. We made sure our competitor knew this. In fact, we made sure they knew what day at the show we were going to announce. Just as we predicted, they picked the day before us for their announcement in an effort to preempt our company launch with theirs. We made sure they heard how shocked and upset we were that they were going to beat us to an announcement in our market.
Our competitor announced on a Monday solidifying their position in the small market we had abandoned because we realized it was unprofitable and would not scale.
We announced the next day, positioned as a player in a much larger and broader market with new positioning, strategy and customers.
Our copycat competitor was now publicly locked into a company and product strategy that was obsolete and untenable.
Over the next two years we left them in the dust.
———
While how you iterate and execute your idea is more important than the idea itself, there are parts of your intellectual property a startup does need to protect. More on this in the next post.
Lessons Learned
Your business concept is not a company. Lots of people have ideas. Typically they are just a set of untested hypotheses.
Successful companies are about the learning, discovery, iteration on your initial ideas. If someone can do a better job iterating hypotheses and executing than you can, you deserve to fail.
No business plan survives first contact with customers
The real value is finding the product/market fit. That’s not found in a set of slides.
In my 21 years of startups I’ve had my ideas “stolen” twice. Once it almost mattered. This is about the time it didn’t.
Worries from the garage One of the worries I hear from entrepreneurs (not just my students) is that Customer Development means getting out of the building and sharing what you are working on. What if, gasp, someone steals my idea? Then all my hard work will be for nothing.
This actually happened to me twice in my career.
The first time was at Rocket Science Games. I was positioning the company as the second coming of the video games businesses at the intersection of “Hollywood Meets Silicon Valley.” This was a great positioning, it helped us raise lots of money and get tons of press. I had a wonderful set of slides that illustrated (to me) this inevitable trend. At the end of the presentation was one “uber” chart I had labored over for months which laid out all the converging trends in the industry. I used it in all presentations and gave it at industry conferences.
Are those my initials on the slide? Fast forward nine months. My co-founder, head of business development and I were in Japan raising money. We were sitting in the conference room of a large well-respected media firm when their CEO breezed in to give us an overview of who they were and how forward thinking their firm was. I thought highly of this firm and was in awe of their content and films so I was a bit blown away when the CEO got to the finale of their presentation. It was, as he explained, the sum of their strategy and strategic thinking for online media. And the slide was….
My slide.
Not a summary of my slide, or a Japanese copy of my slide, but my actual slide. I stood up from my seat, and walked around the boardroom table to get closer to the screen just to be sure. The CEO was beaming at my interest in the details of the slide. Examining the slide, I pointed to the bottom right and said to our translator, “Tell him my initials are still on the bottom.” The interpreter’s face went white, and after a lot of “I can’t tell him that,” he did.
We weren’t sure if we should feel insulted or complimented, but after a few deep breaths (and a lot of kicking under the table by my head of business development) my smart VP of business development used it as an opportunity to point out how honored we were that there was an obvious strategic alignment between the two companies. (I sat there smiling tightly.) Given the potential for a cross-cultural meltdown all parties behaved politely. The CEO turned out to be a very nice guy and rented a big bus to take his staff and all of us sightseeing, dinner and drinking around Tokyo. (I’m sure when he got back to the office he was handing out a personalized knife to the executive on his staff who had borrowed my slide.)
In the end, the CEO couldn’t get his board to give us the cash in exchange for the Japanese distribution rights and some equity. We ended up raising money from Sega.
I heard later that the slide disappeared from his presentation.
—–
The next time one of my ideas was “borrowed,” it was a little less benign and more like the nightmare founders fear. More in the next post.
Lessons Learned
If you present slides publicly, assume everyone including your competitors will have them.
If you present slides privately, assume a high probability that your competitors will acquire them
Do not put your trade secrets, proprietary algorithms, patentable technology, secret sauce, etc. on presentation slides – ever.
That still leaves you tons to talk about in a first and even second meeting.
For slides that contain diagrams or drawings that you created, make sure your initials and date are on them.
On first description, hearing the “get out of the building and talk to customers” precept of Customer Development leads people to say, “Oh, I get it. Customer Development is all about gathering a list of what features customers want by talking to them, surveying them, or running “focus groups.”
It’s not.
One of the times I screwed this up it left a legacy of 25 years of questionable design in microprocessor architecture.
Little Indians and Big Indians At MIPS Computers, my second semiconductor company, I was the VP of Marketing and defacto head of Sales. As the engineers were busy rearchitecting the original Stanford MIPS chip into a commercial product, one of my jobs was to find out what features customers wanted. One of the specific requests from our chip architects was to find out whether customers would want the chip to have data stored as big-endian or little-endian.
“Endianness” refers to the byte order of data stored in external memory. Data can be stored with the most significant byte at the lowest memory address – big-endian, or it can be stored with the least significant byte at the lowest memory address – little-endian.
Different computers used different endianness. The leading minicomputer of the day, the DEC VAX, used little-endian, as did microprocessors such as the Intel 8086 (used in the IBM PC) and the Mostek 6502 (used in the Apple II.) On the other hand, the Motorola 68000 microprocessor (used in the Sun and Apollo engineering workstations) and the IBM 360/370mainframes were big-endian.
The term “endian” came from Jonathan Swift’s Gulliver’s Travels. In it the Lilliputians argue over how they should eat their hard boiled eggs. One group ate from the little end first – little-endians while the other ate theirs from the big end – big-endians. This turned into a dispute over the “right way” and led to war – just like it did for generations of computer architects.
Just Add Every Feature As I surveyed potential customers on which version of “endiannes” they wanted, prospects who had their data on VAX minicomputers or IBM PC’s were unequivocal. “It has to be little-endian or we won’t design your chip into our systems.” And when I heard from those who had data on Sun or Apollo workstations or IBM mainframes, the answer was equally unambiguous. “It has to be big-endian or we’ll never adopt your microprocessor.” I still remember the day I talked to Ram Banin, the head of engineering of Daisy Systems (a maker of Electronic Design Automation workstations) and he said, “Steve, you’ll never make every potential customer happy. Why don’t you tell your engineers to build both byte-orders into your new chip?”
What a great idea. Now I didn’t have to decide or figure out whether one set of customers was more valuable than the other. I ran back to the company and said customers had told us, “We have to do both little and big endian.” The reaction from the chip circuit design guys was, “OK, we could do that. We can put both little- and big-endian in the chip, and it won’t cost us more than 1,000 gates.” The reaction from our software guys was a little less kind. “Are you out of your !? *x! minds? Do you understand you are doubling the amount of work you are going to make for generations of software engineers?
No, not really. I was just in marketing.
All I had done was proudly go out and get customer input. Isn’t that what I was supposed to do?
No.
Customer Development is about Testing the Founder’s Hypothesis Any idiot can get outside the building and ask customers what they want, compile a feature list and hand it to engineering. Gathering feature requests from customers is not what marketing should be doing in a startup. And it’s certainly not Customer Development.
test the founders hypothesisabout the customer problem
testif the product concept and minimum feature set solve that problem
This is a big idea and worth repeating. Customer Development is about testing the founder’s hypothesis about what constitutes product/market fit with the minimum feature set. Thereby answering the questions, “Does this product/service as spec’d solve a problem or a need customers have?” Is our solution compelling enough that they want to buy it or use it today? You know you have achieved product/market fit when you start getting orders (or users, eyeballs or whatever your criteria for success was in your business model.)
The time to start iterating the product is if and only if sufficient customers tell you your problem hypotheses are incorrect or point out features you missed that would cause them not to buy. If you’re lucky you’ll find this out early in Customer Discovery or if not, when no one buys in Customer Validation.
The Jury is Still Out At MIPS I was out collecting feature requests.
We put both byte orders into the MIPS chip. It’s been there for 25-years.
Lessons Learned
Startups begin with hypotheses about a customer problem or need
Founders talk to customers to discover and validate whether the total solution solves that problem or addresses that need
If, and not only if, there are no “buy signs” from the customer or customers repeatably point out missing features, does the product change
Collecting feature lists and holding focus groups are for established companies with existing customers looking to design product line extensions
Since our kids were little our Thanksgiving tradition was to head to Hawaii with friends and eat Thanksgiving dinner under the palm trees to the sound of the waves next to the warm ocean. (Imu turkey can’t be beat if you’re trying to exceed any rational amount of salt intake.) This year, with the kids grown, their choice was to fly up from Southern California and spend the holidays at our ranch. My brother and sister in-law, niece and nephew are here, and we’re all going to spend Thanksgiving morning creating a new tradition - an extended family scavenger hunt that will take us across the ranch trails. Hopefully we won’t run into any wildlife bigger than us (other than our assortment of rattlesnakes, rabbits, deer, bobcats, wild boar, and mountain lions). Our friends who run the state park surrounding our ranch will join all of us for Thanksgiving dinner.
So no post today on entrepreneurship, Secret History of Silicon Valley, Customer Development, Lean Startups, etc. Just a reflection on my family and hopes for our children.
A Few Thoughts for Thanksgiving
On this day it’s hard not to be grateful and give thanks for the things that matter – family, friends, our health, and feel blessed for all the things that have come to us. It’s harder to remember that we have no perpetual rights to them, they aren’t our due, but they’re gifts. We try our best to give back to our community and country and always wonder – is it enough?
We’ve taken the kids to enough places in the world to realize the United States still remains a country of opportunity and hope. For all its flaws, America is still a beacon of liberty and justice. My parents were immigrants who came through Ellis Island with nothing but the clothes on their backs – but they believed in the American dream. They worked hard their entire lives so their children could have a better life. Each year I teach hundreds of students from around the world who come to America to pursue their version of this same dream.
This year as American families face economic hardships, (one out of eight Californian’s are unemployed,) we remember that as a nation we are still a generous people, willing to share and give to others less fortunate then ourselves – both at home and abroad. I hope we managed to teach our children compassion and charity for others. And as they find their own way in life, they will continue to give back to others.
I’m grateful to those who serve our country and remember that people sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf. I hope our children remember that freedom needs to be earned and that they too find their way to serve their country.
The Lean Startup Circle is a Google discussion group (anyone can join) centered on Customer Development/Lean Startup strategy, tactics and implementation. They were kind enough to sponsor a meet-up in San Francisco.
The Times Square Strategy discussion I had with Eric Ries, was still top of mind, so instead of my standard Customer Development lecture, I offered my thoughts on: the origin of Customer Development, where we are today, and where does Customer Development go, and how you can help get it there.
The video below was my presentation to the group.
The slides below go with the video. Just click through them as you watch the video. Extra credit if you know the back-story of slide 1 and why it’s appropriate for founders and their team.
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Thursday is Thanksgiving Day in the U.S. I’ll have a non-entpreneuership post about family and reflection.
For those that know me, I’m kind of a “life is too short” kind of guy. I liked to fail fast, move on, and not look back.
However, in catching up with the VP of Sales of Ardent last night, I was reminded one of the few times I did return for closure.
National Supercomputer Centers For a decade starting in 1985, the National Science Foundation (NSF) established and spent a pile of money (~$50 million/year) on four supercomputing centers in the U.S. – Cornell University; University of Illinois, Urbana-Champaign; the Pittsburgh Supercomputing Center at Carnegie Mellon University; and the San Diego Supercomputer Center at the University of California at San Diego. The ostensible goal of these centers was to allow scientists and researchers access to supercomputers to simulate commercial phenomena that were too expensive, too dangerous or too time consuming to physically build.
The reality was that the U.S. Nuclear Weapons Laboratories used supercomputers to run their hydrodynamics codes for nuclear weapon design and the National Security Agency used them to decrypt codes. But with the cold-war winding down these agencies could no longer be counted on to provide Cray Research with enough business to sustain the company. Commercial applications needed to be found that could take advantage of this class of computers.
The search for commercial supercomputer applications was good news for Ardent, as this was our business as well. But bad news was that the supercomputing centers had concluded that they could justify their existence (and budget) only by buying the biggest and most expensive supercomputers Cray Research made.
We Lost the Deal At Ardent we were building a personal supercomputer powerful enough to run and display numerical simulations just about the time the National Science Foundation was funding these centers. I remember that the Pittsburgh Supercomputing Center had put out a request for a proposal for a supercomputer to replace the Cray X-MP they installed in 1986. In reading it, there was no doubt that it was written only in a way that Cray could respond.
I realized that given the amount of money the Supercomputing Center wanted to spend on buying the new Cray Y-MP (list price $35 million,) we could put an Ardent personal supercomputer next to every scientist and researcher connected to the university. I responded to their RFP by proposing that Ardent build the Pittsburgh Supercomputing Center a distributed supercomputing environment with hundreds of Ardent personal supercomputers rather than a monolithic Cray supercomputer.
As one could imagine this was the last thing the supercomputer center management wanted to hear. All their peers were buying Cray’s, and they wanted one as well. We had support from the scientists and researchers who had bought one of our machines and were beginning to see that distributed computing would ultimately triumph, but bureaucracy marched on, and we lost the bid.
In my career I’ve been involved with lots of sales deals, and for some reason losing this was the one deal I never forgot. Maybe because a win here would have meant success rather than failure for the company, perhaps because I really believed we could make the impossible happen and win. For whatever reason, I hated that particular Cray that got installed in Pittsburg.
One of the benefits of teaching is that it forces me to get smarter. I was in New York last week with my class at Columbia University and several events made me realize that the Customer Development model needs to better describe its fit with web-based businesses.
Dancing Around the Question Union Square Ventures was kind enough to sponsor a meetup the night before my class. In it, I got asked a question I often hear: “What if we have a web-based business that doesn’t have revenue or paying customers? What metrics do we use to see if we learned enough in Customer Discovery? And without revenue how do we know if we achieved product/market fit to exit Customer Validation?”
I gave my boilerplate answer, “I’m a product guy and I tend to invest and look at deals that have measurable revenue metrics. However the Customer Development Model and the Lean Startup work equally well for startups on the web. Dave McClure has some great metrics…” It was an honest but vaguely unsatisfying answer.
Union Square Ventures The next morning I got to spend time with Brad Burnham, partner at Union Square Ventures talking about their investment strategy and insights about web-based businesses. Bill and his partner Fred Wilson have invested in ~30 or so companies with 27 still active.
They’re putting money into web services/business – most without early revenue. It’s an impressive portfolio. By the time the meeting was over I left wondering whether the Customer Development model would help or hinder their companies.
Eric Ries in Times Square For any model to be useful it has to predict what happens in the real world – including the web. I realized the Customer Development model needs to be clearer in what exactly a startup is supposed to do, regardless of the business model.
What we concluded is that the Customer Development model needs an additional overlay.
Four Questions Just as a reminder, the Customer Development has four simple steps: Discovery, Validation, Creation and Company Building. But it also requires you to ask a few questions about your startup before you use it.
The first question to ask is: “Does your startup have market risk or is it dominated by technical risk?” Lean Startup/Customer Development is used to find answers to the unknowns about customers and markets. Yet some startups such as Biotech don’t have market risk, instead they are dominated by technical risk. This class of startup needs to spend a decade or so proving that the product works, first in a test tube and then in FDA trials. Customer Development is unhelpful here.
Use the Lean Startup - When There's Market Risk
The second question is: “What’s the “Market Type” of your startup? Are you entering an existing market, resegmenting an existing market, or creating an entirely new market?” Market Type affects your spending and sales ramp after you reach product/market fit. Startups who burn through their cash, usually fail by not understanding Market Type.
The third question (and the one Eric and I came up with watching the people stream by in Times Square): “What is the “Business Model” of your startup?” Your choice of Business Model affects the metrics you use in discovery and validation and the exit criteria for each step.
I joined the board of Cafepress.com when it was a startup. It was amazing to see the two founders, Fred Durham and Maheesh Jain, build a $100 million company from coffee cups and T-shirts.
But Cafepress’s most memorable moment was when the founders used a “Lessons Learned” VC pitch to raise their second round of funding and got an 8-digit term sheet that same afternoon.
Here’s how they did it.
Fail Fast and Cheap Fred and Maheesh had started 9 previous companies in 6 years. Their motto was: “Fail fast and cheap. And learn from it.” Cafepress literally started in their garage and was another set of experiments only this time it caught fire. They couldn’t keep up with the orders.
Tell the Story of the Journey The company got to a point where additional capital was needed to expand just to keep up with the business (a warehouse/shipping center collocated with UPS, etc.) Rather than a traditional VC pitch I suggested that they do something unconventional and tell the story of their journey in Customer Discovery and Validation. The heart of the Cafepress presentation is the “Lessons Learned from our Customers” section. Their presentation looked like this:
Market/Opportunity
Lessons Learned Slide 1
Lessons Learned Slide 2
Lessons Learned Slide 3
Why We’re Here
Telling the Cafepress Customer Discovery and Customer Validation story allowed Fred and Maheesh to take the VC’s on their journey year by year.
After these slides, these VC’s recognized that this company had dramatically reduced risk and built a startup that was agile, resilient and customer-centric.
The presentation didn’t have a single word about Lean Startups or Customer Development. There was no proselytizing about any particular methodology, yet the results are compelling.
The VC firm delivered a term sheet for an 8-digit second round that afternoon.
Never mistake motion for action. -Ernest Hemingway
One of an entrepreneur’s greatest strengths is their relentless pursuit of a goal. But few realize how this differs from most of the population. Watching others try to solve problems reminded me why entrepreneurs are different.
Progress Report Last week I happened to be sitting in my wife’s office as she was on the phone to my daughter in college. Struggling with one of her classes my daughter had assured us that she was asking for help – and was reporting on her progress (or lack of it).
She had sent several emails to the resource center asking for help. She was also trying to set up a meeting with her professor. All good, and all part of the “when you’re stuck, ask for help” heuristic we taught our kids. But the interesting part for me was learning that in spite of her efforts no one had gotten back to her.
She believed she had done all things that could be expected from her and was waiting for the result.
I realized that my daughter had confused motion with action.
This reminded me of a conversation with one of my direct reports years before my daughter was born.
Status Report At Ardent the marketing department was responsible for acquiring applications for our supercomputer. This required convincing software vendors to move their applications to our unique machine architecture. Not a trivial job considering our computer was one of the first parallel architectures, and our compiler required specific knowledge of our vector architecture to get the most out of it. Oh, and we had no installed customer base. I had hired the VP of marketing from a potential software partner who was responsible to get all this 3rd party software on our computer. Once he was on board, I sat down with him on a weekly basis to review our progress with our list of software vendors.
Think Different I still remember the day I discovered that I thought about progress differently than other people. Our conversation went like this:
Me: Jim, how are we doing with getting Ansys ported?
Jim: Great, I have a bunch of calls into them.
Me: How are we doing on the Nastran port?
Jim: Wonderful, they said they’ll get back to me next month.
Me: How about Dyna 3D?
Jim: It’s going great, we’re on their list.
The rest of the progress report sounded just like this.
After hearing the same report for the nth week, I called a halt to the meeting. I had an executive who thought he was making progress. I thought he hadn’t done a damn thing.
Why?
The Difference Between Motion and Action One of Jim’s favorite phrases was, “I got the ball rolling with account x.” He thought that the activities he was doing – making calls, setting up meetings, etc. – was his job. In reality they had nothing to do with his job. His real job – the action – was to get the software moved onto our machine. Everything he had done to date was just the motion to get the process rolling. And so far the motion hadn’t accomplished anything. He was confusing “the accounting” of the effort with achieving the goal. But Jim felt that since he was doing lots of motion, “lots of stuff was happening.” In reality we hadn’t gotten any closer to our goal than the day we hired him. We had accomplished nothing – zero, zilch, nada. In fact, we would have been better off if we hadn’t hired him as we wouldn’t have confused a warm body with progress.
When I explained this to him, the conversation got heated. “I’ve been working my tail off for the last two months…” When he calmed down, I asked him how much had gotten accomplished. He started listing his activities again. I stopped him and reminded him that I could have hired anyone to set up meetings, but I had brought him in to get the software onto our machine. “How much progress have we made to that goal?” “Not much,” he admitted.
Entrepreneurs are Relentless Jim’s goal was to get other companies to put their software on an unfinished, buggy computer with no customers. While a tough problem, not an insurmountable one for an entrepreneur focused on the objective, not the process.
This was my fault. It had taken me almost two months to realize that other people didn’t see the world the same way I did. My brain was wired to focus on the end-point and work backwards, removing each obstacle in my path or going around them all while keeping the goal in sight. Jim was following a different path.
Focused on the process, he defined progress as moving through a step on his to-do list, and feeling like progress was being made when he checked them off. The problem was his approach let others define the outcome and set the pace.
The difference between the two ways of thinking is why successful entrepreneurs have the reputation for being relentless. To an outsider it looks like they’re annoyingly persistent. The reality is that their eyes are on the prize.
Teaching Moment If you’re not born with this kind of end-goal focus, you can learn this skill.
My wife and I called our daughter back, declared a family “teaching moment,” and explained the difference between motion and action, and asked her what else she could do to get help for class. She realized that more persistence and creativity was required in getting to the right person. The next day, she was in the resource center having figured out how to get the help she needed.
Lessons Learned
Most people execute linearly, step by step
They measure progress by “steps they did”
Entrepreneurs focus on the goal
They measure progress by “accomplishing their goals”
Getting “funded” is the holy grail for most entrepreneurs. Unfortunately in early stage startups the drive for financing hijacks the corporate DNA and becomes the raison d’etre of the company. Chasing funding versus chasing customers and a repeatable and scalable business model, is one reason startups fail.
This post describes how companies using the Customer Development model can increase their credibility, valuation and probability of getting a first round of funding by presenting their results in a “Lesson Learned” venture pitch.
It should go without saying that this post is not advice, nor is it recommendation of what you should do, it’s simply my observation of how companies using Customer Development positioned themselves to successfully raise money from venture investors.
Product Development – Getting Funded as The Goal In a traditional product development model, entrepreneurs come up with an idea or concept, write a business plan and try to get funding to bring that idea to fruition. The goal of their startup in this stage becomes “getting funded.” Entrepreneurs put together their funding presentation by extracting the key ideas from their business plan, putting them on PowerPoint/Keynote and pitching the company – until they get funded or exhausted.
What are Early Stage VC’s Really Asking?
When you are presenting to a VC there are two conversations going on – the one you are presenting and the one that investors are thinking as they are listening to your presentation. (If they’re not busy looking at their Blackberry’s/iPhone’s.)
A VC listening to your presentation is thinking, “Are you going to blow my initial investment, or are you going to make me a ton of money? Are there customers for what you are building? How many are there? Now? Later?” Is there a profitable business model? Can it scale?” And finally, “Is this a team that can build this company?”
The Traditional VC Pitch Entrepreneurs who pursue the traditional product development model don’t have customer data to answer these questions. Knowing this venture firms have come up with a canonical checklist of what they would like to see. A typical pitch to a venture firm might cover:
Technology/Product
Team
Opportunity/Market
Customer Problem
Business Model
Go to Market Strategy
Financials
Given that the traditional pitch has no hard customer metrics, (and VC’s don’t demand them,) you get funded on the basis of intangibles that vary from firm to firm: Do you fit the theme or thesis of the venture firm? Did the VC’s like your team? Do they believe you have a big enough vision and market. Did the partner have a good or bad day, etc. Tons of advice is available on how to pitch, present and market your company.
I believe all this advice is wrong. It’s akin to putting lipstick on a pig. The problem isn’t your pitch, it’s your fundamental assumption that you can/should get funded without having real customer and product feedback. No amount of learning how to get a VC meeting or improving your VC demo skills will fix the lack of concrete customer data. You might as well bring your lucky rabbits foot to the VC meeting.
Customer Development – Getting Funded After You Find a Repeatable Model In contrast, if you are following a Customer Development process you have a greater chance of getting listened to, believed and funded.
Just as a refresher. The first step in Customer Development was Customer Discovery; extracting hypotheses from the business plan and getting the founders out of the building to test the hypotheses in front of customers. Your goal was to preserve your cashwhile you turned these guesses into facts and searched for a repeatable and scalable sales model. Your proof that you have a business rather than a hobby comes from customer orders or users for your buggy, unfinished product with a minimum feature set.
If you’re following Customer Development you are now raising money because even with this first rev of the product you think you’ve found product/market fit and you want to scale.
What VC’s Really Want But Don’t Know How to Ask For or Get Mike Maples at Maples Investments observes that the quality of pitches from entrepreneurs get better as you climb the “Hierarchy of Proof.”
On the bottom, and least convincing are statements about your “idea.”
Next are hypothesis – “I think customers will care about x or y “
Better are facts from customers – “We interviewed 30 customers with 20 questions”
Even better is “Customer Validation”– “We just got $50K from a customer” or “we got 100,000 users spending x minutes on our site”
Finally if you’re ever so lucky – “Everyone’s buying in droves and we’re here because we need money to scale and execute”
If you’ve actually been doing Customer Development at a minimum you’re at step 3 or 4. If not, you don’t have enough data for a VC presentation. Get out of the building, get some more customer feedback, spin your product and go back and read the book.
“Lessons Learned” – A New Type of VC Pitch A Customer Development fundraising presentation tells the story of your journey in Customer Discovery and Validation. While your presentation will cover some of the same ground as the traditional VC pitch, the heart of the presentation is the “Lessons Learned from our Customers” section. The overall presentation looks something like this:
Market/Opportunity
Team
Lessons Learned Slide 1
Lessons Learned Slide 2
Lessons Learned Slide 3
Why We’re Here
IMVU's Original VC Presentation - Will Harvey & Eric Ries
Here’s What We Thought, What We Did, What We Learned Notice that each of the “Lessons Learned” slide has three major subheads and a graph:
“Here’s What We Thought.”
“Here’s What We Did.”
“Here’s What Happened.”
A Progress Graph
Here’s What We Thought is you describing your initial set of hypotheses. Here’s What We Did allows you to talk about building the first-pass of the products minimum feature set. Here’s What Happened is the not so surprising story of why customers didn’t react the way you thought they would. A Progress Graph on the right visually shows how far you’ve come (in whatever units of goodness you’re tracking – revenue, units, users, etc.)
Telling the Customer Discovery and Customer Validation story this way allows you to take VC’s on your journey through all the learning and discovery you’ve done. After three of these slides, smart VC’s will recognize that by iterating on your assumptions you have dramatically reduced risk– on your nickel, not theirs. They will realize that you have built a startup that’s agile, resilient and customer-centric.
Your presentation doesn’t have a single word about Lean Startups or Customer Development. There is no proselytizing about any particular methodology, yet the results are compelling.
This is a radical departure from a traditional VC pitch. It will blow the minds of 70-80% of investors. The others will throw you out of their office.
Guaranteed Funding – Not Will this type of presentation guarantee you funding? Of course not. Even if you have the worlds best Lessons Learned slides you might find out that your particular market (i.e. consumer Internet) might have a really, really high bar of achievement for funding.
In fact, just trying to put three Lessons Learned slides together showing tangible progress will make most startups realize how hard really doing Customer Development is.
At an entrepreneurs panel last week questions from the audience made me realize that the phrase “Lean Startup” was being confused with “Cheap Startup.”
Lean Startups aren’t Cheap Startups A Lean Startup is not about the total amount of money you may spend over the life of your startup. It is aboutwhen in the life of your company you do the spending.
Over its lifetime a Lean Startup may spend less money than a traditional startup. It may end up spending the same amount of money as a traditional startup. And I can even imagine cases where it might burn more cash than a traditional startup.
Lets see why.
The Price of Mistakes are Inversely Proportional to Available Capital In times of abundant venture capital if you miss your revenue plan, additional funding from your investors is usually available to cover your mistakes – i.e. you get “do-overs” or iterations without onerous penalties (assuming your investors still believe in the technology and vision.) In times when venture capital is hard to get, investors extract high costs for failure (down-rounds, cram downs, new management teams, shut down the company.)
The key contributors to an out-of-control burn rate is 1) hiring a sales force too early, 2) turning on the demand creation activities too early, 3) developing something other than the minimum feature set for first customer ship. Sales people cost money, and when they’re not bringing in revenue, their wandering in the woods is time consuming, cash-draining and demoralizing. Marketing demand creation programs (Search Engine Marketing, Public Relations, Advertising, Lead Generation, Trade Shows, etc.) are all expensive and potentially fatal distractions if done before you have found product/market fit and a repeatable sales model. And most startup code and features end up on the floor as customers never really wanted them.
Therefore when money is hard to come by, entrepreneurs (and their investors) look for ways to reduce cash burn rate and increase the chance of finding product/market fit before waste you bunch of money. The Customer Development process (and the Lean Startup) is one way to do that.
Repeatable and Scalable Sales Model In Customer Development your goal is not to avoid spending money but to preserve your cash as you search for a repeatable and scalable sales model and then spend like there is no tomorrow when you find one.
This is the most important sentence in this post and worth deconstructing.
Preserve your cash: When you have unlimited cash (internet bubbles, frothy venture climate,) you can iterate on your mistakes by burning more dollars. When money is tight, when there aren’t dollars to redo mistakes, you look for processes that allow you to minimize waste. The Customer Development process says preserve your cash by not hiring anyone in sales and marketing until the founders turn hypotheses into facts and you have found product/market fit.
As you search: Customer Development observes that when you start your company, all you and your business plan have are hypotheses, not facts –and that the founders are the ones who need to get out of the building to turn these hypotheses into customer data. This “get out of the building” activity is the Customer Discovery step of the Customer Development Model.
Customer Development Model
Repeatable: Startups may get orders that come from board members’ customer relationships or heroic, single-shot efforts of the CEO. These are great, but they are not repeatable by a sales organization. What you are searching for is not the one-off revenue hits but rather a repeatable pattern that can be replicated by a sales organization selling off a pricelist or by customers coming to your web site.
Scalable: The goal is not to get one customer but many – and to get those customers so each additional customer adds incremental revenue and profit. The test is:If you add one more sales person or spend more marketing dollars, does your sales revenue go up by more than your expenses?
Sales model A sales model answers the basic questions involved in selling your product: “Is this a revenue play or a freemium model going for users? Something else? Who’s the customer? Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Where is the budget for purchasing the type of product you’re selling? What’s the customer acquisition cost? What’s the lead and/or traffic generation strategy? How long does an average sale take from beginning to end? Etc.”
Finding out whether you have a repeatable, scalable sales model is the Customer Validation step of Customer Development. This is the most important phase in customer development. Have you learned how to sell your product to a target customer? Can you do this without running out of money?
Scale like there is no tomorrow The goal of an investor-backed startup is not to build a lifestyle business. The goal is to reach venture-scale (~10x return on investment.) When you and your board agree you’ve found a repeatable and scalable sales model (i.e. have product/market fit,) then you invest the dollars to create end user demand and drive those customers into your sales channel.
If you confuse Lean with Cheap when you do find a repeatable and scalable sales model, you will starve your company for resources needed to scale. Customer Development (and Lean) is about continuous customer contact/iteration to find the right time for execution.
The Customer Development Venture Pitch At this point I often hear entrepreneurs say, “We don’t have the money to scale. We’ve been running on small investments from friends and family or angels. How do we raise the big bucks?”
How to raise real money with a Customer Development presentation in the next post.
This post is the latest in the “Secret History Series.” They’ll make much more sense if you watch the video or read some of the earlier posts for context. See the Secret History bibliography for sources and supplemental reading.
This is the second of three posts about the rise of “risk capital” and how it came to be associated with what became Silicon Valley.
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The First Valley IPO’s Silicon Valley first caught the eyes of east coast investors in the late 1950’s when the valleys first three IPO’s happened: Varian in 1956, Hewlett Packard in 1957, and Ampex in 1958. These IPOs meant that technology companies didn’t have to get acquired to raise money or get their founders and investors liquid. Interestingly enough, Fred Terman, Dean of Stanford Engineering was tied to all three companies.
Varian made a high power microwave tube called the Klystron, invented by Terman’s students Russell and Sigurd Varian and William Hansen. In 1948 the Varian brothers along with Stanford professors Edward Ginzton and Marvin Chodorow founded Varian Corporation in Palo Alto to produce klystrons for military applications. Fred Terman and David Packard of HP joined Varian’s board.
Terman was also on the board of HP. Terman arranged for a research assistantship to bring his former student, David Packard, back from a job at General Electric in New York to collaborate with William Hewlett, another of Terman’s graduate students. Terman sat on the HP board from 1957-1973.
Ampex made the first tape recorders in the U.S (copied from captured German models,) and Terman was on its board as well. Ampex’s first customer was Bing Crosby who wanted to record his radio programs for rebroadcast (and had exclusive distribution rights.) Ampex business took off when Terman introduced Ampex founder Alex Poniatoff to Joseph and Henry McMicking. The McMicking’s bought 50% of Ampex for $365,000 (some liken this to the first VC investment in the valley.) McMicking and Terman introduced Ampex to the National Security Agency, and Ampex sales boomed when their audio and video recorders became the standard for Electronic Intelligence and telemetry signal collection recorders.
Meanwhile on the West Coast – “The Group” 1950’s When Ampex was raising its money, in 1952, an employee of Fireman’s Fund in San Francisco, Reid Dennis, managed to put $20,000 in the deal. Five years later Dennis and a small group of angel investors who called themselves “The Group” started investing in new electronics companies being formed in the valley south of San Francisco. These angels who were all working in their day jobs at various financial institutions, would invite startup electronics companies up to San Francisco to pitch their deals and they would invest an average of $75 -$300K per deal.
First group specifically investing in the valley’s electronics industry
SBIC Act of 1958 During the cold war the launch of Sputnik-1 by the Soviet Union in 1957 both traumatized and galvanized the United States. Having the first earth satellite launched by a country that been portrayed as a third-world backwater with a bellicose foreign policy shocked the U.S. into believing it was behind the Soviet Union in innovation. In response, one of the many U.S. national initiatives (DARPA, NASA, Space Race, etc.) to spur innovation was a new government agency to fund new companies. The Small Business Investment Company (SBIC) Act in 1958 guaranteed that for every dollar a bank or financial institution invested in a new company, the U.S. government would invest three (up to $300,000.) So for every dollar that a fund invested, it would have four dollars to invest.
While SBIC’s were set up around the country, companies in Northern California including Bank of America, Firemans Fund and American Express (Reid Dennis of the Group ran theirs), began to set up SBIC funds to tap the emerging microwave and new semiconductor startups setting up shop south of San Francisco. And for the first time, private companies like Continental Capital, Pitch Johnson & Bill Draper and Sutter Hill were formed to take advantage of the government largesse from the SBA.Like all government programs, the SBIC was fond of paperwork, but it began to formalize, professionalize and standardize the way investors evaluated risk.
SBIC’s were worth noting for:
The good news – government money for startups encouraged a “risk capital” culture at large financial institutions.
The better news – government money encouraged private companies to form to invest in new startups
The bad news – the government was more interested in rules, regulations and accounting then startups (because some SBIC’s saw the government funds as a license to steal)
By 1968 over 600 SBIC funds provided 75% of all venture funding in the U.S.
In 1988 after the rise of the limited partnership that number would be 7%.
Limited Partnerships By the end of the 1950’s there was still no clear consensus about how to best organize an investment company for risky ventures. Was it like George Doriot’s ARD venture fund – a publicly traded closed end mutual fund? Was it using government money as a private SBIC firm? Or was it some other form of organization? Many investors weren’t interested in working for a large company for a salary and bonus, and most hated the paperwork and salary limitations that the SBIC imposed. Was there some other structure?
The limited partnership offered one way to structure an investment company. The fund would have limited life. It would charge its investors annual “management fees” to pay for the firm’s salaries, building, etc. In a typical venture fund, the partners receive a 2% management fee.
But the biggest innovation was the “carried interest” (called the “carry”.) This is where the partners would make their money. They would get a share of the profits of the fund (typically 20%.) For the first time venture investors would have a very strong performance incentive.
In 1958 General William Draper, Rowan Gaither (founder of the RAND corporation) and Fred Anderson (a retired Air Force general) founded Draper, Gaither and Anderson, Silicon Valley’s (and possible the worlds) first limited partnership. The venture firm was funded by Laurance Rockefeller and Lazard Freres, but after some dispute lost to the sands of time, Rockefeller pulled his financing, and the firm was dissolved after the first fund.
The first limited partnership that lasted for a while was formed by Davis and Rock in 1961. Arthur Rock, an investment banker at Hayden Stone in New York (who helped broker the financing of Fairchild) moved out to San Francisco in 1961 and partnered with Tommy Davis. Davis (an ex-WWII OSS agent) then a VP at the Kern Land Company got involved with investing in technology companies through Fred Terman. Davis’s first investment in 1957 was Watkins-Johnson (the maker of microwave Traveling Wave Tubes for electronic intelligence systems) where he sat on its board with Fred Terman. Rock and Davis would raise a $5M fund from east coast institutions and while they invested only $3.4 million of it by the time they dissolved their partnership in 1968 – they returned $90 million to their limited partners – a 54% compound growth rate.
Limited partnerships are worth noting for:
By the 1970’s the limited partnership would become the preferred organizational form for venture investors
The “carried interest” (the “carry”) assured that the venture partners would only make real money if their investments were successful. Aligning their interests with their limited investors and the entrepreneurs they were investing in.
The limited life of each fund; 7-10 years of which 3-5 years would be spent actively investing, focused the firms on investments that could reasonably expect to have “exits” during the life of the fund.
The limited life of each fund allowed venture firms to be flexible. They could change the split of the carry in follow on funds, add partners with carry in subsequent funds, change investing strategy and focus in follow-on funds, etc.
Silicon Innovation Collides with Risk Capital Lacking a “risk capital” infrastructure in the 1950′s military contracts and traditional bank loans were the only options microwave startups had for capital. The first semiconductor companies couldn’t even get that – Shockley and Fairchild could only be funded through corporate partners. But by the 1960′s the tidal wave of semiconductor startups would find a valley with a growing number of SBIC backed venture firms and limited partnerships.
A wave of silicon innovation was about to meet a pile of risk capital.
This post is the latest in the “Secret History Series.” They’ll make much more sense if you watch the video or read some of the earlier posts for context. See the Secret History bibliography for sources and supplemental reading.
This is the first of two posts about the rise of “risk capital” and how it came to be associated with what became Silicon Valley.
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Building Blocks of Entrepreneurship By the mid 1950’s the groundwork for a culture and environment of entrepreneurship were taking shape on the east and west coasts of the United States. Stanford and MIT were building on the technology breakthroughs of World War II and graduating a generation of engineers into a consumer and cold war economy that seemed limitless. Communication between scientists, engineers and corporations were relatively open, and ideas flowed freely. There was an emerging culture of cooperation and entrepreneurial spirit.
At Stanford, Dean of Engineering Fred Terman wanted companies outside of the university to take Stanford’s prototype microwave tubes and electronic intelligence systems and build production volumes for the military. While existing companies took some of the business, often it was a graduate student or professor who started a new company. The motivation in the mid 1950’s for these new startups was a crisis – we were in the midst of the cold war and the United States military and intelligence agencies were rearming as fast as they could.
Yet one of the most remarkable things about the boom in microwave and silicon startups occurring in the 1950’s and 60’s was that it was done without venture capital. There was none. Funding for the companies spinning out of Stanford’s engineering department in the 1950’s benefited from the tight integration and web of relationships between Fred Terman, Stanford, the U.S. military and intelligence agencies and defense contractors.
These technology startups had no risk capital – just customers/purchase orders from government/military/intelligence agencies.
This post is about the rise of “risk capital” and how it came to be associated with what became Silicon Valley.
Risk Capital via Family Money 1940’s During the 1930’s, the heirs to U.S. family fortunes made in the late 19th century – Rockefeller, Whitney, Bessemer - started to dabble in personal investments in new, risky ventures. Post World War II this generation recognized that:
Technology spin-offs coming out of WWII military research and development could lead to new, profitable companies
Entrepreneurs attempting to commercialize these new technologies could not get funding; (commercial and investment banks didn’t fund new companies, just the expansion of existing firms,) and existing companies would buy up entrepreneurs and their ideas, not fund them
There was no organized company to seek out and evaluate new venture ventures, manage investments in them and nurture their growth.
Several wealthy families in the U.S. set up companies to do just that – find and formalize investments in new and emerging industries.
In 1946 Jock Whitney started J.H. Whitney Company by writing a personal check for $5M and hiring Benno Schmidt as the first partner (Schmidt turned Whitney’s description of “private adventure capital” into the term “venture capital”).
Jock Whitney writes himself a check to fund J.H. Whitney Co.
That same year Laurance Rockefeller founded Rockefeller Brothers, Inc., with a check for $1.5 million. (23 years later they would rename the firm Venrock.)
Bessemer Securities, set up to invest the Phipps family fortune (Phipps was Andrew Carnegie’s partner,)
These early family money efforts are worth noting for:
They were “risk capital,” investing where others feared
They invested in a wide variety of new industries – from orange juice to airplanes
They almost exclusively focused on the East Coast
They used family money as the source of their investment funds
East Coast Venture Capital Experiments In 1946, George Doriot, founded what is considered the first “venture capital firm” – American Research & Development (ARD). A Harvard Business School professor and early evangelist for entrepreneurs and entrepreneurship, Doriot was the Fred Terman of the East Coast. Doroit had the right idea with ARD (funding startups out of MIT and Harvard and raising money from outsiders who weren’t part of a private family) but picked the wrong model for raising capital for his firm. ARD was a publicly traded venture capital firm (raising $3.5 Million in 1946 as a closed-end mutual fund) which meant ARD was regulated by the Securities and Exchange Commission (SEC.) For reasons too numerous to mention here, this turned out to be a very bad idea. (It would be another three decades of experimentation before the majority of venture firms organized as limited partnerships.)
The region around Boston’s Route 128 would boom in the 1950’s-70’s with technology startups, many of them funded by ARD. ARD’s most famous investment was the $70,000 they put into Digital Equipment Corporation (DEC) in 1957 for 77% of the company that was worth hundreds of millions by its 1968 IPO. It wasn’t until the rise of the semiconductor industry and a unique startup culture in Silicon Valley that entrepreneurship became associated with the West Coast.
Georges Doriot the first VC
Doriot and American Research and Development are worth noting for:
ARD was almost exclusively focused on the East Coast
ARD proved that institutional investors, not just family money had an appetite for investing into venture capital firms.
Corporate Finance One of the ironies in Silicon Valley is that the two companies which gave birth to its entire semiconductor industry weren’t funded by venture capital. Since neither of these startups were yet doing any business with the military—and venture capital as we know it today did not exist, they had to look elsewhere for funding. Instead, in 1956/57, Shockley Semiconductor Laboratory and Fairchild Semiconductor were both funded by corporate partners – Shockley by Beckman Instruments, Fairchild by Fairchild Camera and Instrument.
More on the rise of SBIC’s, Limited Partnerships and the venture capital industry as we know it today in the next post.
At Ardent we assembled an amazing group of talented engineers to build personal supercomputers to sell to scientists and engineers. (Context here.) The company failed.
Getting Out of the Building Wasn’t Entertainment – Discovery and Validation
Now that I was the master of the “facts” about customer needs in these specialized vertical markets, and with my team of vertical marketers, I thought I had achieved absolution and redemption. Opinions had been eliminated as part of marketing’s dialog inside the company; we had achieved “fact nirvana.” But there was one fatal flaw. As I enjoyed my post-graduate vertical marketing education, I had forgotten the real purpose of spending time in the field.
While understanding how customer’s do their work was one key part of Customer Discovery, I neglected the other key component – Customer Validation - to understand whether there were sufficient number of customers who had a problem that needed to be solved – and would pay to solve it. I had needed to ask customers four simple questions.
Did the customers know they had a problem?
If so, did they want to change the way they were doing things to solve that problem?
If so, how much would they pay to solve the problem?
Would they write us a Purchase Order now before our supercomputer was even complete, to be the first to solve their problems?
In hindsight, these questions seem blindingly apparent yet not asking them led to the ultimate demise of Ardent. I just assumed that since customers were talking to me and spending time with me, it must mean that they agreed with our new company’s vision and would spend piles of money with us. At this point in my career I didn’t understand that the goal of getting outside the building was not only finding markets with potential customers to sell to but also confirming the company’s vision, business model and product/market fit.
I had done a good job of Customer Discovery but failed at Customer Validation.
Ignoring the Red Flags
While I had lots of people willing to talk to me, we never really pushed hard to see if any customers were willing to buy and pay for the product before it shipped.
Early startup customers are visionaries just like the founders selling to them. If your startup’s vision is compelling enough, these early customers want to buy into the dream of what could be, and they want to get in early. They will put up with an unfinished system that barely works to get a competitive advantage outside their company (or sometimes a political one inside their company.) They will count on your startup to listen to their needs for subsequent releases or follow-on systems that actually deliver on the initial promise.
All industries, markets and segments have these visionary, early adopters. It is one of the wonderful intersections between human nature, capitalism, and startups. Not finding a sufficient set of these early visionaries is the biggest red flag a company can encounter. Ignoring these warning signs is fatal.
Product/Market Fit
Getting out of the building is not to collect feature lists from prospective customers nor run tons of focus groups (I had passed this test.) Instead it was to validate the product/market fit by discovering if their were enough customers who would buy our product as spec’d. This was where I had failed at Ardent. Once we had found our target customers we spent our meetings describing our new personal supercomputer and what it could do for these researchers instead of listening and truly understanding whether what we were offering was a “nice to have it” or “got to have it.”
If I had had actually been asking “Were we solving a problem these scientists and engineers felt they had?” I would have gotten a half-hearted “maybe.” If I had followed that up with a “If our personal supercomputer delivers as promised, would you write me a check now, before it ships?” I would have seen that no one was falling over themselves to be the first to buy our product. Another clue: lots of people said, “We’d try it if you give it to us.” That answer is always a dead give-away that you don’t yet have a product compelling enough to build a business.
As often happens in a startup, we confused our own vision and passion with the passion of our potential customers.
I had talked too much and listened too little.
What did the company do when we heard customer input that contradicted our business plan and assumptions? More in the next post.
Lessons learned:
We had “discovered” Ardent’s initial markets and customers
We spent too much time selling our vision and not enough time validating whether customers would actually buy
A lack of early, eager purchasers is a red-flag – time to revisit your business model
At Ardent we were building personal supercomputers to sell to scientists and engineers. (Context here.) While the last post was titled “You Know You’re Getting Close to Your Customers When They Offer You a Job“, this post should probably be titled, “You Know You’re Getting Close to Your Customers When You Offer Them a Job.”
I would discover that there was a more effective alternative in building a marketing department than hiring traditional marketers with MBA’s.
Building an Advisory Board In my travels outside the building I kept my eyes out for articulate and visionary scientists and engineers who had expertise we lacked, and were willing to help in an advisory capacity. I set up an advisory board as a vehicle to get these industry experts engaged with the company and product. Some of these advisors from the academic community would work with our of VP of Engineering and help us solve specific technical problems.
Other advisors provided marketing with industry-specific advice in our initial vertical markets (computational fluid dynamics, computational chemistry, finite element analysis, and petroleum engineering). They gave us input on 1) features our system needed, 2) what applications we needed to have, and 3) how to sell to people just like them. Of course we also hoped that in listening to their advice in how to build the perfect computer for customers just like them, they would actually buy one of the first computers. Since some of these advisory board members were leaders in their fields, we knew they would tell their peers about our company. Our company’s stock was an inducement, but all of them were in it to help us build a better computer.
Velvet Painting Period - MFLOPS Poster
Engineers as Marketers
There was one other reason I was talent-spotting our advisors and potential customers. In most other companies a product-marketing department was responsible for the pricing, positioning and promotion of the product. Yet in our case the product, the machine as delivered from engineering, was a blank, featureless computer with just an operating system and compilers. The hardware held no interest for our target customers until it had become a “whole product,” – that is not until the computer had the complete suite of applications appropriate for a scientist in their specific vertical market – i.e. all the applications to run computational fluid dynamics or finite element analysis.
While I had learned a lot about our target markets in the first few months, I would never know as much as people who had spent their careers in these fields. Since the universe of people who were great marketers who also understood these esoteric applications like finite element analysis could be counted on one hand, (and were all working at Cray, the market leader) my choices were limited. I could either hire smart MBAs who were generalists and try to get them up to speed on these simulation applications, or I could hire some of the most articulate domain experts and teach them how to be marketers.
I chose to hire engineers from within each of our target markets and set up “Steve’s one month MBA course for engineers.”
At the time this was a pretty controversial decision. These hires were definitely not your standard marketing types. We hired a PhD in computational fluid dynamics from Duke who had worked on helicopter design. (Years later he would become a venture capitalist at Sequoia Capital.)
Our head of finite element analysis came from General Motor’s Chevy division, where he headed up one of their analysis groups. (He would go on to be a co-founder of two mechanical engineering software companies.) The rest of the vertical marketing recruits had similar backgrounds (and similar careers.) (I never could find one from the petroleum industry so I wore that hat along with the VP of Marketing title.)
Few of them had ever seen a data sheet or a price list let alone written one, but they were domain experts, they knew their fields, and they could communicate the benefits of owning a machine like ours to run their applications. They knew which applications were critical for their markets and which were nice-to-have. And they were responsible for helping our 3rd party software group reach the right application providers to port their software to our computer. Since these marketers knew what publications their peers read and what conferences and trade shows they attended, they led our presence at the right shows and conferences. They knew the technology trendsetters in their fields and got us in front of them. In short order they learned how to transition from being customers on the receiving end of a sales pitch to giving one. To a person they became passionate evangelists and effective marketers.
Technical Marketing Years later in my career I would realize I had simply reinvented what the early pioneers in Silicon Valley knew and did – hiring engineers who were domain experts who could talk as peers to customers and communicate effectively with their own company’s engineers. (Back in the 1960’s and 70’s no sane MBA’s would work for a Silicon Valley startup.) While MBA’s have a ton of useful skills, what they don’t have is what most marketing departments lack – customer insight. I found that having a senior marketer responsible for business strategy surrounded by ex-engineers and domain experts makes one heck of a powerful marketing department.
A quick diagnostic I now use for marketing departments: if you are in a startup selling to a specific set of customers and/or industry and your marketing department doesn’t have any people from that industry, your tenure as a VP of Marketing has passed its half-life.
Lessons learned:
Advisory boards with domain experts get you connected quickly to customer needs
In specialized markets, hire domain experts, and teach them to be marketers
In 1985 Ardent Computer was determined to create a market niche for personal supercomputers. To understand our potential markets, we started by analyzing the marketing literature from Cray Research then crisscrossed the country talking to prospective customers – scientists and researchers in advanced corporate R&D centers and universities – to understand their needs.
Simulation applications
After six months, we hypothesized that our most likely customers were scientists and engineers who used one of five applications: computational fluid dynamics, finite element analysis, computational chemistry and seismic data processing and reservoir simulation.
At Boeing we had learned aircraft designers needed to calculate the airflow and turbulence around wings and engines. Instead of building a new wing to test designs, numerical simulation would allow them to use a supercomputer to build a virtual model of a wing on the screen and use an application called computational fluid dynamics to watch the resulting airflow without ever flying a plane. If they didn’t like what they saw (say the wing had more drag than expected), they could change the design and rerun the simulation.
At General Motors we heard from mechanical engineers who needed to calculate the strength, breaking point and failure modes of structures – everything from piston rods to bumpers. Their interest was easy to understand. Before computer simulation, they would test real objects until they physically broke (or get sued when something important broke, blew up, or collapsed.) Now applications called finite element analysis could calculate these stresses and failure modes on a computer screen.
A third simulation market, this one new and just emerging, allowed biologists to examine how drugs would interact by simulating them on a computer. A precursor to today’s biotech revolution, these computational chemistry applications allowed the active docking sites of potential drugs to be modeled and tested on a computer screen rather than in a test tube.
Finally, we could see that petroleum engineers at oil companies like Chevron and Exxon were using computers in exploration and extraction with seismic data processingand reservoir simulation, applications which were moving oil companies into the supercomputer age.
Traveling around the country had helped me begin to understand how these customers currently did their work, what journals they read, where they got their funding, what other software they ran on their machines, etc. I came back to the company and described the day-in-the-life of each type of customer.
This was one of the happiest times in my life as a marketer. I had known nothing about supercomputers and numerical simulation applications; now there wasn’t a day that went by that I wasn’t learning something new. As I traveled to some of the most arcane trade shows and conferences (AIAA, SPE, MSC, etc.), my hotel room was stacked with the journals and textbooks about each vertical market just to keep up with the people we were meeting. (I was a marketer, not an engineer and most of the fine points were way over my head – and probably not just the fine points. But reading their literature allowed me to discuss the problems and opportunities with customers.)
My Velvet Painting Period
You Know You’re Getting Close to Your Customers When They Offer You a Job I believed that good marketers used their own products. I got facile enough with a few of the applications that I could even run some of them myself. I could build simple finite element models with Patran and set up a run of the Nastran analysis codes.
Later on in the company’s life I went to give a lunch-time seminar to Chevron’s La Habra research center on the use of graphics supercomputers in petroleum applications. I spoke about the state of the art in computational reservoir simulation and what could be accomplished using finite difference and finite element methods on the new class of machines that were coming from companies like ours. During the question and answer session my heart was in my throat since like any good marketer, my depth of knowledge was no more than one level away from being a complete idiot. At the end of the talk the head of the research facility came up to me and said, “That was a great talk. We’re glad your company hired a real petroleum engineer to come speak to us. We hate when the sales and marketing types come down and try to get us to buy something.”
For one of the few times in my life I was at a loss for words, and I was completely unprepared for what came next. “Here’s my card, if you ever want to consider a career in Chevron research. We’d be happy to talk to you.”
Marketing was really fun.
Lessons learned:
To sell to customers you need to understand them: how they work, what they do and what problem you will solve for them.
You can’t understand customers from inside your building.
As VP of Marketing at our new startup, the CEO literally threw me out of the building and told me not to return until I understood the market and could identify the key applications and customers for Ardent’s new personal supercomputer. (See the previous Ardent posts for context.)
Supercomputers With the introduction in 1976 of the Cray-1, supercomputers were defined as the fastest vector-processing computer, one in which a single instruction performed operations on an array rather than a single number. Cray’s first customers were the U.S. Nuclear Weapons Laboratories which used supercompurters to run their hydrodynamics codes to simulate what went on in the first microseconds in a nuclear weapon and the National Security Agency (with Cray putting in a special population count hardware instruction) used to facilitate decryption of codes.
At first only the national laboratories and the largest companies could afford to buy supercomputers, (the Cray-1 cost ~$9 million) but over time scientists and researchers were also starting to use them. Companies wanted to run numerical simulations to model things that were too expensive, too dangerous or too time consuming to physically build. Because of the vagaries of how floating point units in computers were designed, your average IBM mainframe of the day would take forever to run a simulation application. A supercomputer could be a 100x faster.
What Markets? At Ardent our hypothesis was that if we could build a desktop supercomputer powerful enough to run and display these numerical simulations there were enough customers to make this a big business. My job was to figure out what markets Ardent should target, who were the key customers in these markets and what applications these customers had to have.
The problem was I didn’t have a clue. And while others in our new startup came from companies like Digital Equipment Corporation (DEC) that had sold computers to automate scientific instrumentation and process control, the computers we were building at Ardent were targeted to different customers and markets.
The one thing I did know is that we were probably going to be running some of the same applications as the market leader Cray. I concluded that my first job was to understand what Cray’s markets, customers and applications. When I learned that Cray users would be giving papers at the Society of Petroleum Engineering conference in Denver the next day, I got on a plane to listen and learn.
Follow the Leader At the conference I attended a bunch of technical sessions, and got lost when the speaker got past, “My name is xxx.” I could see that quite a few oil companies were buying or thinking of buying their own supercomputer. As I walked out of the conference hall, I ran into a small booth with salespeople from Cray. Since their computers were way too large to bring to a trade show, the Cray booth just had literature describing their machines. I grabbed one of each piece of literature, stuffed into my bag, and wandered through the exhibit hall looking at other hardware and petroleum software companies.
Later I sat down for lunch and began to leaf through the bag of data sheets and brochures I had collected. Hmm… typical booth stuff…key chains, data sheets, pens… Until I got to the material from Cray.
Intelligence As I leafed through the Cray sales material, a glossy magazine with the headline CrayChannels jumped out of the pile. Skimming a few pages, I realized that this particular issue was all about computational fluid dynamics, one of Cray’s key markets. The articles described the applications these users depended on and featured interviews with their most important customers.
I went back and looked at the cover not quite believing what I was reading was real. Cray Channels was describing my market, applications and customers for me. Was it possible that my market research was being handed to me by the existing market incumbent?
I kept thinking, “could this be possible? Did Cray ever publish any more of these magazines?” I looked at the cover of the magazine again and almost fell off my chair. It was Volume 7 issue 2. These magazines had been published for the last seven years. Could Cray have actually been describing their markets and users for that long?
I ran back to the Cray booth and as casually as I could, asked the salesman about the magazine. He assured me that each one profiled a different market, applications and users. I could order back issues from their publications department.
I don’t remember how quickly I got to a payphone, but I’m pretty sure that every back issue of these magazines were on the way to Sunnyvale by the end of that day.
Supercomputer Porn When the back issues of Cray Channels arrived at Ardent, I ripped open the package with the Cray return address and eagerly started to flip through them. I was excited about what I was going to learn, yet somehow felt guilty, as if I really shouldn’t be looking at them. The pictures were great but I was reading it for the articles. But I was breathing heavy and it felt like I was looking at supercomputer porn. The magazines got passed around to all the engineers until they were dog-eared and worn.
I spent the next few days building a table with three columns: markets, applications, key customers. At the same time I had found the Wall Street analyst who followed Cray (now a public company) who kept a list of where every one of Cray’s machines was installed. I could now cross-correlate the markets by company who used supercomputers.
I started sharing what I had learned about potential target markets with our engineering team and my CEO. We agreed that now we had a roadmap, it was time to hit the road, talk to Cray customers and learn about supercomputer markets and applications in detail.
Lessons learned:
If you are in an existing market or trying to resgement an existing market you need to understand the market leader
Market leaders tend to educate the market
Step one for a startup is know what the market leader knows
Some of the most important business lessons are learned in the most unlikely ways. At Ardent I learned many of them with a sharp smack on the side of the head from a brilliant but abusive boss. Not a process I recommend, but one in which the lessons stuck for a lifetime. (Read the previous Ardent post for context.)
Lessons to Learn
By the time I joined Ardent I thought I was an experienced marketer, but I’ll never forget my first real lesson in what it meant to understand customers and product/market fit.
We were sitting in our conference room in our first “system-planning meeting” trying to define the specifications of our new supercomputer and make the trade-offs between what was possible to build, and what customers in this new market would actually want and need. The conversation that day would become one of my professional watermarks.
Marketing is Heard From
Engineering was discussing how sophisticated the graphics portion of our computer should be, debating cost and time-to-market tradeoffs of arcane details such as double-buffering, 24 versus 32-bits of color, alpha channels, etc. I was pleased with myself that not only did I understand the issues, but I also had an opinion about what we should build. All of a sudden I decided that I hadn’t heard the sound of my own voice in a while so I piped up: “I think our customers will want 24-bits of double-buffered graphics.”
Silence descended across the conference table. The CEO turned to me and asked “What did you say?” Thinking he was impressed with my mastery of the subject as well as my brilliant observation, I repeated myself and embellished my initial observation with all the additional reasons why I thought our customers would want this feature. I was about to get an education that would last a lifetime.
Picture the scene: the entire company (all 15 of us) are present. For this startup we had assembled some of the best and brightest hardware and software engineers in the computer industry. My boss, the CEO, had just come from a string of successes at Convergent Technologies, Intel and Digital Equipment, names that at that time carried a lot of weight. Some of us had worked together in previous companies; some of us had just started working together for the first time. I thought I was bright, aggressive and could do no wrong as a marketer. I loved my job and I was convinced I was god’s gift to marketing. Now in a voice so quiet it could be barely heard across the conference table our CEO turns to me and says, “That’s what I thought you said. I just wanted to make sure I heard it correctly.” It was the last sentence I heard before my career trajectory as a marketer was permanently changed.
Get Out of My Company
At the top of his lungs he screamed, “You don’t know a damn thing about what these customers need! You’ve never talked to anyone in this market, you don’t know who they are, you don’t know what they need, and you have no right to speak in any of these planning meetings.” I was mortified with the dressing down in front of my friends as well as new employees I barely knew. Later my friends told me my face went pale. He continued yelling, “We have a technical team assembled in this room that has more knowledge of scientific customers and scientific computers than any other startup has ever had. They’ve been talking to these customers since before you were born, and they have a right to have an opinion. You are a disgrace to the marketing profession and have made a fool of yourself and will continue to do so every time you open your mouth. Get out of this conference room, get out of this building and get out of my company; you are wasting all of our time.”
I was stunned by the verbal onslaught. At that moment I felt so small I could have walked out of a room underneath the crack in a closed door.
Facts Not Opinions
The shock quickly wore off as I processed the gist of what he told me. He was right. I personally didn’t have any facts, and if we were counting opinions, there were a bunch more educated opinions in that room than I had. All I had been doing was filling the air with marketing noises.
I was convinced that I had just been humiliatingly fired – 90 days into our new company.
Get Out of the Building
As I got up to leave the room, the CEO said, “I want you out of the building talking to customers; find out who they are, how they work, and what we need to do to sell them lots of these new computers.” Motioning to our VP of Sales, he ordered: “Go with him and get him in front of customers, and both of you don’t come back until you can tell us something we don’t know.”
And he was smiling.
My career as marketer had just begun.
Lessons learned:
Corporate culture is either set by fiat, by default, or by consensus. But regardless of how it gets set, it gets set early
An intelligent opinion is still a guess
The dumbest person with a fact trumps anyone with an opinion
There are no facts inside the building so get the heck outside
Last month on an east coast college tour with my daughter, I found myself in North Carolina for the first time in nearly 24 years.
I had last been in Chapel Hill on a winter’s day in 1986, traveling with the VP of Sales of our new supercomputer startup, Ardent. We were on the University of North Carolina campus to meet with Fred Brooks and Henry Fuchs. We just turned on the rental car radio as we entered campus and heard the mid day BBC news – the space shuttle Challenger had just exploded.
It was the best of times, it was the worst of times Ardent would be my third technology company as a VP of Marketing (Convergent Technologies and MIPS Computers were the other two.) It would be the company where I actually earned the title.
This is the first of a series of posts on the company.
A Phone Call After I left MIPS Computers I was in New York tagging along with a friend (a computer architect whose products at Apple a decade later would change the shape of personal computing) who was consulting for a voice recognition startup. We were sitting in our cheap hotel room when the phone rang. It was my ex boss from Convergent Technologies, “Steve we’ve all just resigned from Convergent and we’re starting a new company. I’ve convinced the team you’d be perfect, come join us as the VP of Marketing.” My ex-boss was going to be the VP of Engineering and I would report to the CEO whose marketing acumen and sales instincts seemed at the time to be telepathic and sense of theater was legend. And so was his reputation for being verbally abusive to his direct reports. Gulp.
The culture and work ethic of Convergent had earned it the title “the Marine Corps of Silicon Valley”. (Not until I was older and wiser did I realize that this was not always meant as a compliment.)
Working with my old boss sounded like a great idea. And in the course of the phone call I put my friend on the phone and let him interview for a job. On the ride to the airport my friend asked me what our new company was going to do.
Only then did I realize we both forgot to ask.
Never mind The first idea for our new company was a software product that looked something like Hypertext. With a bit of research it turned out that a professor at Brown University had invented something close to what we had in mind. The VP of Sales and I flew to Providence to convince Andy van Dam at Brown to join our company, or at a minimum lead our advisory board.
On a rainy day in Providence we tracked Andy down just as he was leaving for a trip to Europe. He agreed to talk to us as he packed his office, and we followed him down the street as he went to get a haircut. With me holding the umbrella our VP of Sales kept reminding him how wonderful it would be if his research could turn into commercial products- all as we all walked downtown to the barbershop. While van Dam sat in the chair getting his haircut, the VP of Sales and I flanked him on either side, with the barber trying to get his clippers in between us. We were painting a picture of hypertext on every desktop computer. I knew we almost had him convinced when our sales guy and Andy started talking to each other in Dutch.
As the conversation began to get down to how much stock and salary we could offer van Dam, we left the barber to finish his work and went to a payphone to call our CEO to confirm the deal. The response from across the country? “Glad you two called, we were trying to get a hold of you guys. Forget the Hypertext idea and come on back to California. We’re building a supercomputer.” Oops. We told Andy we’d talk further when he got back from Europe.
Supercomputers get Personal Back in Sunnyvale my friend had not only been hired but had convinced the team that we should be building hardware – making a new class of computers not a software application. Our vision was that just as the PC was revolutionizing the business market, we were going to do the same for scientists and engineers. We were going to target scientists and researchers who were longing to do “interactive simulations,” requiring both scientific computing and visualization of real-world phenomena. We were going to invent a new product and create an entirely new market by putting a personal graphics supercomputer on every desk.
By the mid 1980’s microprocessor technology—specifically off-the-shelf RISC-based microprocessors like the one from MIPS, my previous startup– had evolved to support the speed needed to support a new class of computers for scientists and engineers. Unlike Intel chips, MIPS chip architecture also made it possible to plug in a math co-processor. By adding a vector unit to these RISC processors, we believed we could take some of the supercomputer market from Cray (at the time the maker of the most powerful scientific computers in the world) as well as from the emerging class of mini-supercomputers (Convex and Alliant.)
To do that we needed to build a supercomputer, but since the RISC processors weren’t fast enough, we decided to build a multiprocessor supercomputer, (running up to 4 processors in parallel.) We had to write our parallelizing and vectorizing compilers and build our own high-end graphics boards, and write our own 3d graphics subroutine language – and put in all in a box that could fit in an office. Oh, and since it was not code compatible with anything, we were going to have to port all the key scientific applications our customers needed (as soon as we figured out who they were.) Some of the other founders had sold minicomputers to scientists and engineers, but no one knew or understood the unique class of applications and customers of supercomputers. We were going to be guessing.
Personal supercomputers meant yet again learning something completely new; new computer architectures, new applications and customers, new markets.
I couldn’t believe they were paying me to do this job; I would have gladly done it for free.
The Streets of Palo Alto As our company was getting formed, I happened to bump into Gordon Bell – the ex VP of Engineering of DEC (the company that defined the minicomputer) on the streets of Palo Alto. (It was Gordon who had prodded John Hennessy and the MIPS team at Stanford to start a commercial chip company.) After telling Gordon what we were doing and who was doing it, he realized that he knew most of our founding team when they all had worked at DEC. I invited him to meet the team. A few days later Gordon became a founder. (Later he would leave for a few years to start the Computing Directorate at the National Science Foundation, help spec what became the Internet and then come back and run Ardent’s engineering.)
I would learn a ton from Gordon for over a decade, not only about practical heuristics for managing complex engineering projects (i.e. the “schedule fantasy factor,”) or his eleven rules of supercomputer design but also a real appreciation for how a technical visionary thinks. (I tried my best to narrow the time that I went from believing that Gordon had yet another insane idea to when I realized it was a profound insight.) It was a challenge to keep up with him (I never did) but it was fun to try.
At the same time Gordon was looking forward, he had a great appreciation of saving the past. He and his wife Gwen would found the Computer Museum, first in the lobby of DEC headquarters, then in Boston (and now as the Computer History Museum in Mountain View, California.) When our kids were little they would play with the computer artifacts (Napier bones and Pascal engines) scattered across their living room and overflowing their shelves when we stayed at their condo in Boston. My first inkling that computing had a history (with deep military connections) was looking at the SAGE air defense computer at the Boston Computer Museum.
I would be lucky in my career to work with Gordon and three other people I consider as mentors. They would all work in this one company.
Get Out of Building
Our trip to North Carolina was part of a year long effort to get out of the building to understand our market, customers and their applications. How I learned to “get out of the building” is in the next post.
Lessons learned:
Ardent’s personal supercomputer pushed at the edge of what was possible to build in technology
Our enthusiasm and passion for technology would soon intersect with our hypotheses about customers and market
The entrepreneur who built the largest startup in the United States is someone you probably never heard of. The guy who replaced him invented the idea of the modern corporation. Understanding the future of entrepreneurship may depend on understanding the contribution each of them made in the past.
This is the first of several posts on Durant versus Sloan.
Alfred P. Sloan
In the middle of the 20th Century Alfred P. Sloan was one of the most famous businessman in the world. Known as the “Inventor of the Modern Corporation,” Sloan was president of General Motors from 1923 to 1956 when the U.S. automotive industry grew to become one of the drivers of the global economy.
The Modern Corporation
Sloan is rightly credited with formalizing the idea of the modern U.S. corporation, and by extension Sloan laid the foundation for America’s economic leadership in the 20th century. One guy really did all of this.
Peter Drucker wrote that Sloan was “the first to work out how to systematically organize a big company. When Sloan became president of GM in 1923 he put in place planning and strategy, measurements, and most importantly, the principles of decentralization.”
Sloan realized that the traditional centralized management structures (like General Motors had in 1920) were poor fits for the management of GM’s already diverse product lines. Top management was trying to coordinate all of the operating details (sales, manufacturing, distribution and marketing,) across all the divisions and the company almost went bankrupt that year when poor planning led to excess inventory (with unsold cars piling up at dealers and the company running out of cash.)
Sloan transferred responsibility down from corporate into each of the operating divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). Each of these GM divisions each focused on its own day-to-day operations and with each division general manager responsible for the division’s profit and loss. Sloan kept the corporate staff small and focused on policymaking, corporate finance and planning. Sloan had each of the divisions start systematic strategic planning.
Sloan put in place GM’s management accounting system (borrowed from DuPont) that for the first time allowed the company to: 1) produce an annual operating forecast that compared each division’s forecast (revenue, costs, capital requirements and return on investment) with the company’s financial goals. 2) Provide corporate management with near real-time divisional sales reports and budgets that indicated when they deviated from plan. 3) Allowed management to allocate resources and compensation among divisions based on a standard set of corporate-wide performance criteria.
Finally, Sloan transformed corporate management into a real profession, establishing the standard that the professional manager is duty-bound to put the interests of the enterprise ahead of his own.
Modern Corporation Marketing At the same timeGeneral Motors also revolutionized automotive marketing by creating multiple brands of cars, each with its own identity targeted at a specific economic bracket of American customers. The company set the prices for each of these brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac.) Within each brand there were several models at different price points.
The idea was to keep customers coming back to General Motors over time to upgrade to a better brand as they became wealthier. Finally, GM created the notion of perpetual demand within brands by continually obsoleting their own products yearly with new models rolled out every year. (Think of the iPod family and its yearly new models.)
When Sloan took over as president of GM in 1923, Ford and its Model T was the dominant player in the U.S. auto market with 60% of the U.S. car market. General Motors had 20%. By 1931, with the combination of superior financial management and a astute brand and product line strategy, GM had 43% market share to Ford’s 20% – a lead it never relinquished.
Thanks for the History Lesson – So What? Well thanks for the history lesson but why should you care?
If you’re an entrepreneur you might be interested to know that when Sloan took over General Motors in 1923, it was already a $700 million dollar company (about $8.5 billion in sales in today’s dollars.)
Yet you never hear who built that company. Who founded what would become General Motors 16 years earlier in 1904? Where are the charitable foundations, business schools and hospitals named after him? What happened to him? Who was he?
The founder of what became General Motors was William (Billy) Durant. His board (led by the DuPont family) tossed him out of General Motors (for the second time) in 1920 when GM sales were $567 million (about $6 billion in today’s dollars.)
William Durant died managing a bowling alley in Flint Michigan in 1947.
From the day Durant was fired in 1920, and for the next half a century, American commerce would be led by an army of “Sloan-style managers.”
Last week I drove my daughter on an east coast college tour (1500 miles, 8 colleges in 6 days.) We started in North Carolina eating BBQ and enjoying the Southern culture, went through Washington D.C checking out the shopping in Georgetown, saw beautiful horse country in Pennsylvania and upstate NY and headed down into the bays and coves of Connecticut filled with sailboats.
We had some great conversations in the car, but one stuck in my mind. It was something I never thought about, and when I first heard it I thought it was a terrible thing to have taught her. She said, “Dad, one of the great things you and Mom did was never tell us how much things cost.”
Whoa, when I first heard her say that, I thought she meant that we raised a spoiled kid who had and an unlimited sense of entitlement. For a minute it was a pretty depressing thought for a parent. But on further questioning what came out was a bit more interesting and rewarding.
She said, “Dad what I meant was that growing up we loved when we traveled. And I remember staying in everything from little motels to big hotels and resorts, from National parks in Alaska to trips in India. And as kids we never had any idea which was cheap and which was expensive. Now that I’m older, I’m starting to know what things cost. And I realize you guys never told us we had to enjoy something any more or less because of the price. It made me realize that the goal is not to get the most expensive things, but to go and get what you enjoy.”
It was a lesson we never intended to consciously teach.
It made me wonder how many other lessons we taught without knowing.
As a board member, investor and consumer, I’ve encountered companies firing their customers. While this sounds inexplicable to an outside observer, sometimes it makes sense. Other times it’s just plain dumb.
Pattern Recognition One of the great things about being an entrepreneur is that you are constantly running a pattern recognition algorithm against a continual collection of customer and market data. For me this was one of the joys of entrepreneurship – constant learning and new insights. But at times it’s why entrepreneurs can sink their own companies.
The Founder’s New Insight Smart founders are never satisfied with simply executing their current business model, they are constantly observing, orienting and deciding whether their current business model can be made better. This tendency is a two edged sword: by iterating strategy a startup can dramatically improve the size and trajectory of the company, but at times this process can be the bane of venture investors (and why they have prematurely grey hair.) When a startup finds a repeatable sales process and steadily increasing revenue, its investors wants to harvest the rewards and build a culture of “execution.” However, if the founder is still running the company, the last thing he wants is a company complacent with day-to-day execution.
This disconnect – between a founder’s endorphin rush from learning, discovery, insight and acting – versus investors needs for stability, execution and liquidity – is the basis of lots of founder/board travails. (More on this in later posts.) But the purpose of this post is what happens when a founder (or large company CEO) finds a better business model.
Let’s Fire Our Customers Part of the DNA of great entrepreneurs is a bias towards decisive and immediate action. However, when a startup gets past its early days and has acquired a substantial customer base, an insight about a better path, if executed and communicated poorly, can lead to disaster.
I’ve seen startup CEO’s realize that their company could be much more profitable if they only could get rid of some portion of their existing customers. (It’s a natural part of learning about your customers and business model.) But instead of spending the time to move these unprofitable customers politely to some other company, (hopefully a competitor) founders tend to want to do it immediately. “Get it done, now. These customers are idiots and I don’t want them anymore.” The founder has seen the future and wants to get there immediately. And while technically correct, and eventually the company ought to fire unprofitable customers, the result when done by impatient founders is most often less than optimal.
While it is “just business,” many customers form emotional bonds sometimes with products, other times with the company itself. In fact, if you’re doing your job right as a startup, you’re encouraging customers to be passionate about your company and products. When you abruptly break that connection you can quickly generate hordes of hurt, disappointed and now disgruntled customers, who feel jilted and badmouth the company to other potential or existing customers.
If you’ve had taken the time to fire them politely with a bit morepanache and patience, they’re likely to break less furniture as they leave. Entrepreneurs overlook that the customers you fire badly are ones who will do damage to your company for a long, long time (even if the impact of their departure is an increase in profitability.)
The problem isn’t about a founder’s instinct to make a strategic shift. It’s the “do it now” impatience and minimal communication once you have a sizeable customer base. Startups with a customer base need to maintain an ongoing dialog with their customers – not make a set of announcements when the founder thinks it’s time for something new.
This is why entrepreneurship is an art. When you have a critical mass of customers, there’s a fine line between sticking with the status quo too long and changing too abruptly.
You’ve Been an Idiot For Sticking With Us This behavior is not just limited to startups. I’ve watched new CEO’s brought into large existing consumer products companies to turn around a failing strategy. Their new strategy included a complete revamp and simplification of the product line. Yet instead of making their existing customers feel like partners in the turnaround, these smart CEO’s publicly announce that the current product line is obsolete. (“Can’t you see we’re busy reinventing the company?”)
Ok, that’s a great strategy inside the boardroom, but what are you doing to transition your customers to your new strategy? Nothing? No trade-up program? No discount for existing users? No tools to transition your customers data to the new and improved but incompatible product(s)? Congratulations, you’ve just fired your existing customer base. Instead of having loyal customers willing to work with you, you’ve told them, “You own a product we no longer care about. You’ve been an idiot for sticking with us.” The company now needs to acquire new customers rather than upgrade it’s existing ones. (Usually about 10x more expensive.)
The fact that this strategy seems to play out often seems to be symptomatic of turnaround CEO’s transferring their impatience and disdain for the company’s old strategy and products onto that of their loyal customers.
Customers who have been told they were idiots for being loyal tend to leave sadly and with regret. And they rarely come back.
Lessons Learned
The art of firing customers is as important as the art of acquiring them
Don’t confuse your impatience with getting to the new strategy with the damage badly fired customers can do.
New strategic direction in companies with loyal customers have different consequences then when you had no customers
Acquiring new customers are a lot more expensive that converting existing ones.
The first four posts of the Customer Development Manifesto described the failures of the Product Development model. This post describes a solution – the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provide the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
Most startups lack a process for discovering their markets, locating their first customers, validating their assumptions, and growing their business. A few successful ones do all these things. The difference is that the ones that succeed invent a Customer Development model. This post describes such a model.
The Customer Development Model Customer Development is designed to solve the problems of the Product Development model I described in the four previous posts. Its strength is its rigor and flexibility. The Customer Development model delineates all the customer-related activities in the early stage of a company into their own processes and groups them into four easy-to-understand steps: Customer Discovery, Customer Validation, Customer Creation, and Company Building. These steps mesh seamlessly and support a startup’s ongoing product development activities. Each step results in specific deliverables.
The Customer Development model is not a replacement for the Product Development model, but rather a companion to it. As its name should communicate, the Customer Development model focuses on developing customers for the product or service your startup is building.
The Customer Development Model
Four Steps While startups are inherently chaotic (and will never be run from a spreadsheet or checklist inside your building,) the Four Steps of Customer Development are designed to help entrepreneurs leverage the chaos and turn it into actionable data;
Customer Discovery focuses on testing hypotheses and understanding customer problems and needs – in front of customers – by the founders
Customer Validation is where you develop a sales model that can be replicated and scaled
Customer Creation is creating and driving end user demand to scale sales
Company Building transitions the organization from one designed for learning and discovery to a well-oiled machine engineered for execution.
Market Type Integral to the Customer Development model is the notion that Market Type choices affect the way the company will deploy its sales, marketing and financial resources. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer, etc. As a result different market types modify what you do in in each step of Customer Development.
Customer Development is Iterative Learning and discovery versus linear execution is a major difference between this model and the traditional product development model. While the product development model is linear in one direction, the customer development model is a circular track with recursive arrows.The circles and arrows highlight the fact that each step in Customer Development is iterative. That’s a polite way of saying, “Unlike product development, finding the right customers and market is unpredictable, and we will screw it up several times before we get it right.” (Only in business school case studies does progress with customers happen in a nice linear fashion.) The nature of finding a market and customers guarantees that you will get it wrong several times.
The Customer Development model assumes that it will take several iterations of each of the four steps until you get it right. It’s worth pondering this point for a moment because this philosophy of “It’s OK to screw it up if you plan to learn from it” is the heart of the methodology.
The Facts Reside Outside Your Building Customer Development starts by testing your hypotheses outside the building. Not in planning meetings, not in writing multiple pages of nicely formatted Marketing Requirements Documents, but by getting laughed at, ignored, thrown out and educated by potential customers as you listen to their needs and test the fundamental hypotheses of your business.
Failure Is an Option Notice that the circle labeled Customer Validation in the diagram has an additional iterative loop going back to Customer Discovery. As you’ll see later, Customer Validation is a key checkpoint in understanding whether you have a product that customers want to buy and a road map of how to sell it. If you can’t find enough paying customers in the Customer Validation step, the model returns you to Customer Discovery to rediscover what you failed to hear or understand the first time through the loop.
Customer Development is Low Burn by Design The Customer Development process keeps a startup at a low cash burn rate until the company has validated its business model by finding paying customers. In the first two steps of Customer Development, even an infinite amount of cash is useless because it can only obscure whether you have found a market. (Having raised lots of money tempts you to give products away, steeply discount to buy early business, etc., all while saying “we’ll make it up later.” It rarely happens that way.) Since the Customer Development model assumes that most startups cycle through these first two steps at least twice, it allows a well-managed company to carefully estimate and frugally husband its cash. The company doesn’t build its non-product development teams (sales, marketing, business development) until it has proof in hand (a tested sales road map and valid purchase orders) that it has a business worth building. Once that proof is obtained, the company can go through the last two steps of Customer Creation and Company Building to capitalize on the opportunity it has found and validated.
Customer Development is For Winners and Warriors The interesting thing about the Customer Development model is that the process represents the best practices of winning startups. Describe this model to entrepreneurs who have taken their companies all the way to a large profitable business, and you’ll get heads nodding in recognition. It’s just that until now, no one has ever explicitly mapped their journey to success.
Even more surprising, while the Customer Development model may sound like a new idea for entrepreneurs, it shares many features with a U.S. war fighting strategy known as the “OODA Loop” articulated by John Boyd and adopted by the U.S. armed forces in both Gulf Wars – and by others.
The next post provides more details about each of the four steps in the Customer Development model.
Over the last 30 years Wall Street’s appetite for technology stocks have changed radically – swinging between unbridled enthusiasm to believing they’re all toxic. Over the same 30 years, Venture Capital firms have honed their skills and strategies to match Wall Streets needs to achieve liquidity for their portfolio companies.
You have to wonder: does the VC you have on your board today have the right skill set to help you succeed in today’s economic environment?
What Do VC’s Do? One of the biggest mistakes entrepreneurs make is misunderstanding the role of venture capital investors. There’s lots of lore, emotion, and misconceptions of what VC’s do or don’t do for entrepreneurs. The reality is that VC’s have one goal – to maximize the amount of money they return to their investors.To do this they have to accomplish five things;
1) get deal flow – via networking and legwork, they identify likely industries, companies and teams with the potential for rapid growth (less than 10 years),
2) evaluate those companies and teams on the basis of technology, market opportunity, and team. (Each VC firm/partner has a different spin on what to weigh more.)
3) invest in and take equity stakes in exchange for capital.
4) help nurture and grow the companies they invest in.
5) liquidate their investment in each company at the highest possible price.
Going Public VC’s make money by selling their share of your company to some other buyer – hopefully at a large multiple over what they originally paid for it. From 1979 when pensions funds began fueling the expansion of venture capital, the way VC’s sold their portion of your company was to help you take your company “public.” Your firm worked with an investment banking firm that underwrote and offered stock (typically on the NASDAQ exchange) to the public. At this Initial Public Offering your company raised money for its use in expanding the business.
In theory when you went public, everyone’s shares were now tradable on the stock exchange, but usually the underwriters required a six month “lockup” when company insiders (employees and investors) couldn’t sell. After the end of the lockup, venture firms sold off their stock in an orderly fashion, and entrepreneurs sold theirs and bought new cars and houses.
Five Quarters of Profitability During the 1980’s and through the mid 1990’s startups going public had to do something that most companies today never heard of – they had to show a track record of increasing revenue and consistent profitability. Underwriters who would offer the stock to the public typically asked for a young company to show five consecutive quarters of profits. There was no law that said that a company had to, but most underwriters wouldn’t take a company public without it. (On top of all this it was considered very bad form not to have at least four additional consecutivequarters of profits after an IPO.) While there was an occasional bad apple, the public markets rewarded companies with revenue growth and sustainable profits.
What this meant for entrepreneurs and VC’s was simple, profound and unappreciated today: VC’s worked with entrepreneurs to build profitable and scalable businesses. In this time, building a successful business meant building a company that had paying customers quarter after quarter. It did not mean building a startup into a company to flip or hype on the market with no earnings or revenue, but building a company that had paying customers.
Your Venture Capitalists on your board brought your firm their expertise to build long-term sustainable companies. They taught you about customers, markets and profits.
The world of building profitable startups as the primary goal of Venture Capital would end in 1995.
The IPO Bubble – August 1995 – March 2000 In August 1995 Netscape went public, and the world of start ups turned upside down. On its first day of trading, Netscape stock closed at $58/share, valuing the company at $2.7 billion for a company with less than $50 million in sales. (Yahoo would hit $104/share in March 2000 with a market cap of $104 billion.) There was now a public market for companies with no revenue, no profit and big claims. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits on the inflated valuations (regardless of whether or not the company should have ever been public.)
And some companies didn’t even have to go public to get liquid. Tech acquisitions went crazy at the same time the IPO market did. Large companies were acquiring technology startups just to get in the game at the same absurd prices.
What this meant for entrepreneurs and VC’s was simple– the gold rush to liquidity was on. The old rules of building companies with sustainable revenue and consistent profitability went out the window. VCs worked with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were “first mover advantage,” “grab market share” and “get big fast.” VCs or entrepreneurs who talked about building profitable businesses were told, “You just don’t get the new rules.” And to be honest, for four years, these were the new rules. Entrepreneurs and VCs made returns 10x, or even 100x larger than anything ever seen. (No value judgments here, VCs were doing what the market rewarded them for, and their investors expected – maximum returns.)
(And since Venture Capital looked like anyone could do it, the number of venture firms soared as fast as stock prices.)
Venture Capitalists on your board developed the expertise to get your firm public as soon as possible using whatever it took including hype, spin, expand, and grab market share because the sooner you got your billion dollar market cap, the sooner the VC firm could sell their shares and distribute their profits.
The boom in Internet startups would last 4½ years until it came crashing down to earth in March 2000.
The Rise of Mergers and Acquisitions -– March 2003 -2008 After the dot.com bubble collapsed, the IPO market (and most tech M&A deals) shutdown for technology companies. Venture investors spent the next three years doing triage, sorting through the rubble to find companies that weren’t bleeding cash and could actually be turned into businesses. With Wall Street leery of technology companies, tech IPOs were a receding memory, and mergers and acquisitions became the only path to liquidity for startups and their investors. For the next four or five years, technology M&A boomed, growing from 50 in 2003 to 450 in 2006.
What this meant for entrepreneurs and VCs was a bit more complex– the IPO market was all but closed (with the Google IPO in 2004 as a brilliant exception), but it was possible find a buyer for your company. The valuations for acquisitions were nothing like the Internet bubble, but there was a path to liquidity, difficult as it was. (Every startup wanted to believe they could get acquired like YouTube for $1.4 billion.) VCs worked with entrepreneurs to build their company with an eye out for a chance to flip it to an acquirer. The formula for exits was a variation of the formula they used in the Internet bubble, morphing into: brand, hype and sell the company.
In the Fall of 2008, the credit crisis wiped out mergers and acquisitions as a path to liquidity as M&A collapsed with the rest of the market.
So what’s left?
2009 – Back to The Future The bad news is that since the bubble most VC firms haven’t made a profit. It may just be that the message of building companies that have predictable revenue and profit models hasn’t percolated through the VC business model. (Perhaps in direct proportion to the number of “freemium” and “eyeballs” web deals funded.)
It may be that the venture business will have to return to the old days of helping entrepreneurs build companies – not hype them, not spin them, but actually make them worth something to customers and investors.
The question is: do VC’s still have what it takes to do so?
Next time you sit in a board meeting with your VCs, step back a bit from the moment and listen to their advice like you are hearing them for the first time. Are these VC’s who know how to build a company? Is the advice they are giving you going to help you build a repeatable and scalable revenue model that’s profitable quarter after quarter?
Or were they trained and raised in the bubble and M&A hype and still looking for some shortcut to liquidity?
This series of posts of the “Customer Development Manifesto” describes how the failures of the Product Development model for sales and marketing led to the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
13. Not All Startups Are Alike There’s an urban legend that Eskimos-Aleuts have more words to describe snow than other cultures. While that’s not true, it is a fact that entrepreneurs only have one word for “startup.” This post points out that the lack of adequate words to describe very different “types” of startups can lead not only to confusion in execution but also at times to disaster.
The product development model treats all startups like they are in an Existing Market – an established market with known customers. With that implicit assumption, startups hire a VP of Sales with a great rolodex and call on established mainstream companies while marketing creates a brand and buzz to create demand and drive it into the sales channel (web, direct salesforce, etc.)
Most startups following the Product Development Model never achieve their revenue plan and burn through a ton of cash not knowing what hit them.
They never understood Market Type.
Why does Market Type matter? Depending on the type of market it enters, a startup can have very different rates of customer adoption and acceptance and their sales and marketing strategies would be dramatically different. Even more serious, startups can have radically different cash needs. A startup in a New Market (enabling customers to do something they never could before,) might be unprofitable for 5 or more years, (hopefully with the traditional hockey stick revenue curve,) while one in an Existing Market might be generating cash in 12-18 months.
Handspring in a Existing Market As an example, imagine it’s October 1999 and you are Donna Dubinsky the CEO of a feisty new startup, Handspring, entering the billion dollar Personal Digital Assistant (PDA) market. Other companies in the 1999 PDA market were Palm, the original innovator, as well Microsoft and Hewlett Packard. In October 1999 Donna told her VP of Sales, “In the next 12 months I want Handspring to win 10% of the Personal Digital Assistant market.” The VP of Sales swallowed hard and turned to the VP of Marketing and said, “I need you to take end user demand away from our competitors and drive it into our sales channel.” The VP of Marketing looked at all the other PDAs on the market and differentiated Handspring’s product by emphasizing its superior expandability and performance. End result? After twelve months Handspring’s revenue was $170 million. This was possible because in 2000, Donna and Handspring were in an Existing Market. Handspring’s customers understood what a Personal Digital Assistant was. Handspring did not have to educate them about the market. They just need to persuade customers why their new product was better than the competition – and they did it brilliantly.
Palm in a New Market What makes this example really interesting is this: rewind the story 4 years earlier to 1996. Before Handspring, Donna and her team had founded Palm Computing, the pioneer in Personal Digital Assistants. Before Palm arrived on the scene, the Personal Digital Assistant market did not exist. (A few failed science experiments like Apple’s Newton had come and gone.) But imagine if Donna had turned to her VP of Sales at Palm in 1996 and said, “I want to get 10% of the Personal Digital Assistant market by the end of our first year.” Her VP of Sales might had turned to the VP of Marketing and said, “I want you to drive end user demand from our competitors into our sales channel.” The VP of Marketing might have said, “Let’s tell everyone about how fast the Palm Personal Digital Assistant is and how much memory it has.” If they had done this, there would have been zero dollars in sales. In 1996 no potential customer had even heard of a Personal Digital Assistant. Since no one knew what a PDA could do, there was no latent demand from end users, and emphasizing its technical features would have been irrelevant. What Palm needed to do first was to educate potential customers about what a PDA could do for them. In 1996 Palm was selling a product that allowed users to do something they couldn’t do before. In essence, Palm created a New Market. In contrast, in 2000 Handspring entered an Existing Market. (“Disruptive” and “sustaining” innovations, eloquently described by Clayton Christensen, are another way to describe new and existing Market Types.)
The lesson is that even with essentially identical products and team, Handspring would have failed if it had used the same sales and marketing strategy that Palm had used so successfully. And the converse is true; Palm would have failed, burning through all their cash, using Handspring’s strategy. Market Type changes everything.
Market Type Changes Everything Here’s the point. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer. Market Type also affects the market size as well as how you launch the product into the market. As a result different market types require dramatically different sales and marketing strategies.
As a result, the standard product development model is not only useless, it is dangerous. It tells the finance, marketing and sales teams nothing about how to uniquely market and sell in each type of startup, nor how to predict the resources needed for success.
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Next: Part 5 of the Customer Development Manifesto – why your goals and those of your venture investors may not be the same – the last post on what’s broken in the Product Development Model.
This post is part 3 of the “Customer Development Manifesto” series and makes more sense if you read part 1 and part 2.
This post describes how following the traditional product development can lead to a “startup death spiral.” In the next posts that follow, I’ll describe how this model’s failures led to the Customer Development Model – offering a new way to approach startup sales and marketing activities. Finally, I’ll write about how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
12. The Startup Death Spiral: The Cost of Getting Product Launch Wrong By the time of first customer ship, if a startup does not understand its market and customers, failure unfolds in a stylized ritual, almost like a Japanese Noh play.
Three to six months after first customer ship, if Sales starts missing its numbers, the board gets concerned. The VP of Sales comes to a board meeting, still optimistic, and provides a set of reasonable explanations – “our pipeline looks great, but orders will close next quarter” or “we’ve got lots of traffic to our site, we just need to work on conversion.” The board raises a collective eyebrow. The VP of Sales goes back and exhorts the troops to work harder.
To support sales, Marketing tries to “make up a better story,” and the web site and/or product presentation slides start changing (sometimes weekly or even daily). Morale in Sales and Marketing starts to plummet.
Meanwhile, if you have a direct sales force smart salespeople realize that the sales strategy and marketing materials the company headquarters provided don’t work. Each starts inventing and testing their own alternatives about how to sell and position the product. They try different customers, different customer contacts, different versions of the presentations, etc. Instead of a Sales team and organized to sell with a consistent and successful sales roadmap generating revenue, it is a disorganized and unhappy organization burning lots of cash.
You’re Just Not Selling it Right By the next board meeting, the VP of Sales looks down at his shoes and shuffles his feet as he reports that the revenue numbers still aren’t meeting plan. Now the board collectively raises both eyebrows and looks quizzically at the CEO. The VP of Sales, forehead bathed in sweat, leaves the board meeting and has a few heated motivational sessions with the sales team.
Fire the First VP of Sales By the next board meeting, if the sales numbers are still poor, the stench of death is in the air. No one wants to sit next to the VP of Sales. Other company execs are moving their chairs to the other side of the room. Having failed to deliver the numbers, he’s history. Whether it takes three board meetings or a year is irrelevant; the VP of Sales in a startup who does not make the numbers is called an ex-VP of Sales.
Now the company is in crisis mode. Not only hasn’t the sales team delivered the sales numbers, but now the CEO is sweating because the company is continuing to burn cash at what now seems like an alarming rate. Why is it only alarming now? Because the company based its headcount and expenses on the expectation that the Sales organization will bring in revenue according to plan. The rest of the organization (product development, marketing, support) has been burning cash, all according to plan, expecting Sales to make its numbers. Without the revenue to match its expenses, the company is in now danger of running out of money.
Blame it On Marketing In the next 3-6 months, a new VP of Sales is hired. She quickly comes to the conclusion that the company’s positioning and marketing strategy were incorrect. There isn’t a sales problem, the problem is that marketing just did not understand its customers and how to create demand or position the product.
Now the VP of Marketing starts sweating. Since the new VP of Sales was brought on board to “fix” sales, the marketing department has to react and interact with someone who believes that whatever was created earlier in the company was wrong. The new VP of Sales reviews the sales strategy and tactics that did not work and comes up with a new sales plan. She gets a brief honeymoon of a few months from the CEO and the board.
In the meantime, the original VP of Marketing tries to come up with a new positioning strategy to support the new Sales VP. Typically this results in conflict, if not outright internecine warfare. If the sales aren’t fixed in a short time, the next executive to be looking for a job will not be the new VP of Sales (she hasn’t been around long enough to get fired), it’s the VP of Marketing—the rationale being “We changed the VP of Sales, so that can’t be the problem. It must be Marketing’s fault.”
Time for an Experienced CEO Sometimes all it takes is one or two iterations to find the right sales roadmap and marketing positioning that connects a startup with exuberant customers ready to buy. Unfortunately, more often than not, this is just the beginning of an executive death spiral. If changing the sales and marketing execs doesn’t put the company on the right sales trajectory, the investors start talking the “we need the right CEO for this phase” talk. This means the CEO is walking around with an unspoken corporate death sentence. Moreover, since the first CEO was likely to have been one of the founders, the trauma of CEO removal begins. Typically, founding CEOs hold on to the doorframe of their offices as the investors try to pry their fingers off the company. It’s painful to watch and occurs in a majority of startups with first-time CEOs after First Customer Ship.
In flush economic times the company may get two or three iterations to fix a failed launch and bad sales numbers. In tougher times investors are tighter with their wallets and make the “tossing good money after bad” calculations with a more frugal eye. A startup might simply not get a next round of funding and have to shut down.
Any of this sound familiar? Part 4 of the Customer Development Manifesto to follow.
This post describes how the traditional product development model distorts startup sales, marketing and business development. In the next few posts that follow, I’ll describe how thinking of a solution to this model’s failures led to the Customer Development Model – that offers a new way to approach startup sales and marketing activities. Finally, I’ll write about how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
8. The Lack of Meaningful Milestones for Sales, Marketing and Business Development The one great thing about the product development methodology is that it provides an unambiguous structure with clearly defined milestones. The meaning of alpha test, beta test, and first customer ship are pretty obvious to most engineers. In contrast, sales and marketing activities before first customer ship are adhoc, fuzzy, and don’t have measurable, concrete objectives. They lack any way to stop and fix what’s broken (or even to know if it is broken.)
What kind of objectives would a startup want or need for sales and marketing? Most sales executives and marketers tend to focus on execution activities because at least these are measurable. For example, some startup sales execs believe hiring the core sales team is a key objective. Others focus on acquiring early “lighthouse” customers (prominent customers who will attract others.) Once the product begins to ship, startup sales execs use orders and revenue as its marker of progress in understanding customers. (Freemium models have their own scorekeeping.) Marketers believe creating a killer web presence, corporate presentation, are objectives. Some think that hiring a PR agency, starting the buzz and getting coverage in hot blogs or on the cover of magazines at launch are objectives.
While these objectives provide an illusion of progress, in reality they do little to validate the business plan hypotheses about customers and what they will buy. They don’t help a startup move toward a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability.
9. The Use of a Product Development Model to Measure Sales Using the product development diagram for startup sales activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.
Here’s what the product development diagram looks like from a sales perspective.
A VP of Sales looks at the diagram and says, “Hmm, if beta test is on this date, I’d better get a small sales team in place before that date to acquire my first ‘early customers.’ And if first customer ship is on this date over here, then I need to hire and staff a sales organization by then.” Why? “Well, because the revenue plan we promised the investors shows us generating customer revenue from the day of first customer ship.”
I hope this thinking already sounds inane to you. The plan calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, crafted with a set of hypotheses now using the product development model as a timeline for execution. This approach is not predicated on discovering the right market or learning whether any customers will actually shell out cash for your product. Instead you use product development to time your readiness to sell. This “ready or not, here we come” attitude means that you won’t know if the sales strategy and plan actually work until after first customer ship. What’s the consequence if your stab at a sales strategy is wrong? You’ve built a sales organization and company that’s burning cash before you know if you have demand for your product or a repeatable and scalable sales model. No wonder the half-life of a startup VP of Sales is about nine months post first customer ship.
“Build and they will come” is not a strategy, it’s a prayer.
10. The Use of a Product Development Model to Measure Marketing The head of Marketing looks at the same product development diagram and sees something quite different.
For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand at first customer ship, marketing activities start early in the product development process. While the product is being engineered, Marketing begins to create web sites, corporate presentations and sales materials. Implicit in these materials is the corporate and product “positioning.” Looking ahead to the product launch, the marketing group hires a public relations agency to refine the positioning and to begin generating early “buzz” about the company. The PR agency helps the company understand and influence key bloggers, social networks, industry analysts, luminaries, and references. All this leads up to a flurry of press events and interviews, all geared to the product/web site launch date. (During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.)
At first glance this process may look quite reasonable, until you realize all this marketing activity occurs before customers start buying—that is, before the company has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers. In fact, all the marketing plans are made in a virtual vacuum of real customer feedback and information. Of course, smart marketers have some early interaction with customers before the product ships, but if they do, it’s on their own initiative, not as part of a well-defined process. Most first-time marketers spend more of their time behind their desks inside the building then outside talking to potential customers.
This is somewhat amazing since in a startup no facts exist inside the building – only opinions.
Yet even if we get the marketing people out from behind their desks into the field, the deck is still stacked against their success. Look at the product development diagram. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”
11. Premature Scaling The Product Development model leads Sales and Marketing to believe that by first customer ship, come hell or high water, they need fully staffed organizations leads to another disaster: premature scaling.
Startup executives have three documents to guide their hiring and staffing; a business plan, a product development model and a revenue forecast. All of these are execution documents – they direct the timing and hiring of spending as if all assumptions in the business plan are 100% correct. As mentioned earlier there are no milestones that alert a startup to stop or slow down hiring until you have proven until you understand you customers. Even the most experienced executives succumb to the inexorable pressure to hire and staff to “plan” regardless of the limited customer feedback they’ve collected to this point in Alpha and Beta test.
Premature scaling is the immediate cause of the startup Death Spiral. More on this in the next post.
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Part 3 of the Customer Development Manifesto to follow.
After 20 years of working in startups, I decided to take a step back and look at the product development model I had been following and see why it usually failed to provide useful guidance in activities outside the building – sales, marketing and business development.
Every startup has some methodology for product development, launch and life-cycle management. At their best, these processes provide detailed plans, checkpoints and milestones for every step in getting a product out the door: sizing markets, estimating sales, developing marketing requirements documents, prioritizing product features. Yet at the end of the day even with all these processes 9 out of 10 of new products are failures.
So what’s wrong the product development model? The first hint lies in its name; this is a product development model, not a marketing model, not a sales hiring model, not a customer acquisition model, not even a financing model (and we’ll also find that in most cases it’s even a poor model to use to develop a product.) Yet startup companies have traditionally used this model to manage and pace not only engineering but also non-engineering activities.
In this post I’m going to describe the flaws of the product development model. In the next few posts that follow, I’ll describe more specifically how this model distorts startup sales, marketing and business development. And how thinking of a solution to this commonly used model’s failures led to a new model – the Customer Development Model – that offers a new way to approach startup activities outside the building. Finally, I’ll write about how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
Product Development Diagram
1. Where Are the Customers? To begin with, the product development model completely ignores a fundamental truth about startups and new products. The greatest risk in startups —and hence the greatest cause of failure—is not the technology risk of developing a product but in the risk of developing customers and markets. Startups don’t fail because they lack a product; they fail because they lack customers and a profitable business model. This alone should be a pretty good clue about what’s wrong with using the product development diagram as the sole guide to what a startup needs to be doing. Look at the Product Development model and you might wonder, “Where are the customers?”
The reality for most startups today is that the product development model focuses all their attention on activities that go on inside a company’s own building. While customer input may be a checkpoint or “gate” in the process, it doesn’t drive it.
2. The Focus on a First Customer Ship Date
Using the Product Development model also forces sales and marketing to focus on the end point of the process – the first customer ship date. Most sales and marketing executives hired into a startup look at the “first customer ship date,” look at the calendar on the wall, and then work backwards figuring out how to do their job in time so that the fireworks start the day the product is launched.
The flaw in this thinking is that “first customer ship” is simply the date when engineering thinks they “finished” the 1.0 release of the product. The first customer ship date does not mean that the company understands its customers, how to market or sell to them or how to build a profitable business. (Read the preceding sentence again. It’s a big idea.)
Even worse, a startup’s investors are managing their financial milestones by the first customer ship date as well.
The product development model is so focused on building and shipping the product that it ignores the entire process of testing your basic hypothesis about your business model (customers, channel, pricing, etc.) before you ship. Not testing these hypotheses upfront is a fundamental and, in many cases, fatal error most startups make.
Why? Because it isn’t until after first customer ship that a startup discovers that their initial hypotheses were simply wrong (i.e. customers aren’t buying it, the cost of distribution is too high, etc.) As a result the young company is now saddled with an expensive, scaled-up sales organization frustrated trying to execute a losing sales strategy and a marketing organization desperately trying to create demand without a true understanding of customers’ needs.
As Marketing and Sales flail around in search of a sustainable market, the company is burning through its most precious asset—cash.
3. The Focus on Execution Versus Learning and Discovery The product development model assumes that customers needs are known, the product features are known, and your business model is known. Given this certainty, it’s logical that a startup will hire a sales and marketing team to simply execute your business plan. You interview sales and marketing execs for prior relevant experience and their rolodexes, and hope they execute the playbook that worked for them in prior companies.
All of this is usually a bad idea. No one asks, “Why are we executing like we know what we are doing? Where exactly did the assumptions in our startup business plan come from?” Was the sales revenue model based on actually testing the hypotheses outside the building? Or were they a set of spreadsheets put together over late night beers to convince an investor that this is going to be a great deal?
No newly hired sales and marketing exec is going to tell a founder, “Hey my prior experience and assumptions may not actually be relevant to this new startup.” Great sales and marketing people are great at execution – that’s what you hired for. But past experience may not be relevant for your new company. A new company needs to test a series of hypothesis before it can successfully find a repeatable and scalable sales model. For startups in a new or resgemented market, these are not merely execution activities, they are learning and discovery activities that are critical to the company’s success or failure.
4. The Focus on Execution Versus Agility
The product development diagram has a linear flow from left to right. Each step happens in a logical progression that can be PERT charted with milestones and resources assigned to completing each step.
Anyone who has ever taken a new product out to a set of potential customers can tell you that the real world works nothing like that. A good day in front of customers is two steps forward and one step back. In fact, the best way to represent what happens outside the building is more like a series of recursive circles—recursive to represent the iterative nature of what actually happens in a learning and discovery environment. Information and data are gathered about customers and markets incrementally, one step at a time. Yet sometimes those steps take you in the wrong direction or down a blind alley. You find yourself calling on the wrong customers, not understanding why people will buy, not understanding what product features are important. Other times potential customers will suggest a new use for the product, new positioning or even a much better idea.
The ability to learn from those missteps, to recognize new opportunities, and to rapidly change direction is what distinguishes a successful startup from those whose names are forgotten among the vanished.
5. The Outsourcing of Founders Responsibility The Product Development model separates founders from deeply understanding their customers and market. The responsibility for validating the founders original hypotheses is delegated to employees – the sales and marketing team.
This means the founders are isolated from directly hearing customer input – good, bad and ugly. Worse, founders really won’t understand whether customers will buy and what features are saleable until after first customer ship.
When an adroit and agile founder gets outside the building and hears for the nth time that the product is unsellable they will recognize, regroup and change direction. A process to give the founders continuous customer interaction – from day one – is essential.
6. The Focus on a Finished Product Rather than a Minimum Feature Set The passion of an entrepreneur coupled with the product development diagram drives you to believe that all you need to do is build the product (in all its full-featured glory) and customers will come. A Waterfall development process reinforces that inanity. The reality is quite different. Unless you are in an Existing Market, (making a better version of what customers are already buying) you’ll find that your hypothesis about what features customers want had no relationship to what they really wanted.
Most startup code ends up on the floor.
7. Investor Focus on a Broken Model
Ask VC’s why they use the Product Development model to manage a startup and you get answers like, “It’s the way my firm has always done it. Why change something that has worked so well over the last three decades?” Or, “Look at our returns, its always worked for us.” Or at times an even more honest answer, “My senior partners say this is the only way to do it.”
Some firms correctly point out that, “It’s fine if 8 out of 10 of our companies fail if the remaining two return 20x our money. That’s a better return than having 10 out of 10 companies succeed and each return 2x our money. Therefore we don’t want startups doing anything but swinging for the fences.”
The fallacy is that the product development model is the most efficient model for new ventures swinging for the fences– this year, last year, last decade, or since the first startup met their first investor.
Venture portfolio companies don’t succeed because they used the Product Development model they succeeded in spite of using it. The fact is most successful startups abandon the product development model as soon as they encounter customers.
Today, startups using the product development model iterate and learn and discover by burning investor cash. When cash is tight, they go out of business – or they adopt a more efficient model.
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Part 2 of the Customer Development Manifesto to follow.
When I started working in Silicon Valley, every company bringing a new product to market used some form of the Product Development Model. Thirty years later we now realize that its one the causes of early startup failure. This series of posts is a brief explanation of how we’ve evolved from Product Development to Customer Development to the Lean Startup.
The Product Development Diagram Emerging early in the twentieth century, this product-centric model described a process that evolved in manufacturing industries. It was adopted by the consumer packaged goods industry in the 1950s and spread to the technology business in the last quarter of the twentieth century. It has become an integral part of startup culture.
At first glance, the diagram, which illustrates the process of getting a new product into the hands of waiting customers, appears helpful and benign. Ironically, the model is a good fitwhen launching a new product into an existing, well-defined market where the basis of competition is understood, and its customers are known.
The irony is that few startups fit these criteria. (None of mine did.) We had no clue what our market was when we first started. Yet we used the product development model not only to manage product development, but as a road map for finding customers and to time our marketing launch and sales revenue plan. The model became a catchall tool for all schedules, plans, and budgets. Our investors used the product development diagram in our board meeting to see if we were “on plan” and “on schedule.” Everyone was using a road map that was designed for a very different location, yet they are surprised when they end up lost.
Product Development Diagram
To see what’s wrong with using the product development model as a guide to building a startup, let’s first examine how the model is currently used to launch a new product. We’ll look at the model stage-by-stage.
Concept and Seed Stage In the Concept and Seed Stage, founders capture their passion and vision for the new company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company’s vision.
Then the product needs to be defined: What is the product or service concept? What are the features and benefits? Is it possible to build? Is further technical research needed to ensure that the product can be built?
Next, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.
After that there’s a discussion of how the product will reach the customer and the potential distribution channel. The distribution discussion leads to some conclusions about competition: who are they and how they differ. The startup develops its first positioning statement and uses this to explain the company and its benefits to venture capitalists.
The distribution discussion also leads to some assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company’s business plan. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it’s a new division inside a larger company, forecasts talk about return on investment. in this concept and seed stage, creative writing, passion, and shoe leather combine in hopes of convincing an investor to fund the company or the new division.
Product Development In stage two, product development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions.
Engineering focuses on building the product; it designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “product development” and makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.
Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process), the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales who begins to assemble a sales force.
Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure that the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.
Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.
Hopefully, somewhere around this point the investors are happy with the company’s product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch and hits the street and the phone searching for additional capital.
Product Launch and First Customer Ship Product launch and first customer ship is the final step in this model, and the goal the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company’s performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).
Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. The CEO looks at the product launch activities and the scale-up of the sales and marketing team, and yet again goes out, palm up, to the investor community. (In the dot-com bubble economy, the investors used an IPO at product launch to take the money and run, before there was a track record of success or failure.)
The Leading Cause of Startup Death
If you’ve ever been involved in a startup, the operational model no doubt sounds familiar. It is a product-centric and process-centric model used by countless startups to take their first product to market. It used to be if you developed a plan on model that looked like this your investors would have thought you were geniuses.
In hindsight both you and your investors were idiots. Following this diagram religiously will more often than not put you out of business. The diagram was developed to be used by existing companies doing product line extensions - not startups creating new markets or resegmenting existing ones. Most experienced entrepreneurs will tell you that the model collapses at first contact with customers.
VC’s who still believe in the product development model in the 21st century offer no value in building a company other than their rolodex and/or checkbook.
Coming next Part 2: What’s Wrong with Product Development as a Model?
I love TechCrunch. If you’re a startup raising money or just want to see your name online, there’s not a better blog on the web. Reading this TechCrunch post made me remember the first time I saw someone confront a worldview they didn’t expect.
Discovering that your worldview is wrong or mistaken can be a life-changing event. It’s part of growing up but can happen at any age. What you do when it happens shapes who you’ll become.
As a single guy, I got to live in a motel-like room on the site while the married guys lived in town in houses and tried to blend in with the locals. When asked what they did, they said they worked at “the xxx research facility.” (Of course the locals translated that to “oh do you work for the yyy or zzz intelligence agency?”)
One warm summer evening I got invited over to the house of a married couple from my company for a BBQ and after-dinner entertainment – drinking mass quantities of the local beer. The quintessential California couple, they stood out in our crowd as the engineer (in his late 20′s, respected by his peers and the customer) had hair down to his shoulders, sharply contrasting with the military crewcuts of the customers and most of the other contractors. His wife, about my age, could have been a poster child for the stereotypical California hippie surfer, with politics that matched her style – antiwar, anti government, antiestablishment.
One of the rules in the business was that you didn’t tell your spouse, girlfriend, significant other who you worked for or what you worked on – ever. It was always a welcome change of pace to leave the brown of the unchanging desert and travel into town and have dinner with them and have a non-technical conversation about books, theater, politics, travel, etc. But it was a bit incongruous to hear her get wound up and rail against our government and the very people we were all working for. Her husband would look at me out the corner of his eyes and then we’d segue the conversation to some other topic.
That evening I was there with three other couples cooking over the barbie in their backyard. After night fell we reconvened in their living room as we continued to go through the local beer. The conversation happened to hit on politics and culture and my friend’s’ wife innocently offered up she had lived in a commune in California. Well that created a bit of alcohol-fueled cross-cultural disconnect and heated discussion.
Until one of the other wives changed a few lives forever with a slip of the tongue.
Tell Me it Isn’t True
One of the other wives asked, “Well what would your friends in the commune think of you now that your husband is working for intelligence agencies x and y?”
As soon as the words came out of her mouth, I felt time slow down. The other couples laughed for about half a second expecting my friend’s wife to do so as well. But instead the look on her face went from puzzlement in processing the question, to concentration, as she was thinking and correlating past questions she had about who exactly her husband had been working for. It seemed like forever before she asked with a look of confusion, “What do you mean agencies x and y?”
The laughter in the room stopped way too soon, and the room got deathly quiet. Her face slowly went from a look of puzzlement to betrayal to horror as she realized that that the drunken silence, the dirty looks from other husbands to the wife who made the agency comment, and the wives now staring at their shoes was an answer.
She had married someone who never told her who he was really working for. She was living in a lie with people she hated. In less than a minute her entire worldview had shattered and coming apart in front of us, she started screaming.
This probably took no more than 10 seconds, but watching her face, it felt like hours.
I don’t remember how we all got out of the house or how I got back to the site, but to this day I still remember standing on her lawn staring at strange constellations in the night sky as she was screaming to her husband, “Tell me it isn’t true!”
The next day the site supervisor told me that my friend and his wife had been put on the next plane out of country and sent home (sedated) along with the other couple that made the comment. By the time I came back to the United States, he was gone from the company.
It’s been thirty years, but every once an awhile I still wonder what happened to the rest of their lives.
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The End of Innocence
In much smaller ways I’ve watched my children and now my students discover that their worldview is wrong, mistaken or naive. I’ve watched as they realize there’s no Santa Claus and Tooth Fairy; the world has injustice, hypocrisy and inequality; capitalism and politics don’t work like the textbooks and money moves the system; you can’t opt out of dying, and without regulation people will try to “game” whatever system you put in place.
Learning to accept the things you can’t change, finding the courage to change the things you can and acquiring the common sense to know the difference, is part of growing up.
While I love TechCrunch, the post and the quote about the PR agency (“one PR firm has discovered a dynamite strategy, throw ethics out the window”) left me wondering; how do PR agencies interact with TechCrunch and other blog and review sites? Is this behavior an outlier or is it the norm in the PR industry?
I’ve just met four great startups in the last three days.
An Existing Market
All four were trying to resegment an “Existing Market.” An existing market is one where competitors have a profitable business selling to customers who can name the market and can tell you about the features that matter to them. Resegmentation means these startups are trying to lure some of the current or potential customers away from incumbents by either offering a lower cost product, or by offering features that appealed to a specific niche or subset of the existing users.
Some of the conversations went like this:
Startup 1 Entrepreneur -“I’m competing against Company x and have been following the Customer Development process and I’ve talked to lots of customers.” Me – “Have you used Company x’s product? Do you know have they distribute their product? Do you know how they create demand? Do you know how many units they are selling? Do you know the archetype of their customers? Entrepreneur -“Well no but my product is much better than their product and I have this great idea….”
Rule 1: In an existing market Customer Development means not only understanding potential customers, but your competitors in detail – their product features, their sales channels, their demand creation strategy, their business model, etc.
Startup 2 Entrepreneur -“I’m competing against Company x and we are going to offer a lower-cost, web-based version. We’re about to ship next week.” Me –“That’s a great hypothesis, do customers tell you that they’d buy your version if it was cheaper or on the web? Entrepreneur -“Well no but my product is much cheaper and everyone’s on the web and I have this great idea….”
Rule 2: In an existing market Customer Development means understanding whether your hypothesis of why customers will buy match reality. This is easy to test. Do this before you write code you may end up throwing away.
Startup 3 Entrepreneur -“I’m competing against Large Company x and we solve problems for a set of customers – I’ve talked to many of them and they would buy it.” Me – “So what’s the problem?” Entrepreneur – “We just started letting early customers access the product and adoption/sales isn’t taking off the way we thought it would. We only have 20 customers, and Large Company x has millions.” Me – “How are you positioning your product?” Entrepreneur – “We tell potential customers about all our features.”
Rule 3: In an existing market directly compare your product against the incumbent and specifically describe the problems you solve and why Company x’s products do not.”
Startup 4 Entrepreneur -“I have something really, really new. No one has anything like it.” Me – “Isn’t it kind of like Twitter but better?” Entrepreneur – “You don’t get it.”
Rule 4: You may want to think twice positioning as a New Market. If customers immediately get an analogy for your product, don’t dissuade them. Save the “New Billion Dollar Market” positioning for the investors, not customers.
Lessons Learned
Deeply understand the incumbents that make up the Existing Market
The “hypotheses tested to lines of code written” ratio ought to be high
Position against the incumbents weaknesses – their customers will tell you what they are
Existing Markets adoption rates are measured in % market share gained, New Markets have adoption rates which may occur in your company’s lifetime
Swords Into Plowshares After the end of World War II, returning veterans were happy to beat swords into plowshares (and microwave tubes) on the Stanford campus. From 1946 until 1950, Stanford’s Electronic Research Lab conducted basic research in microwave tubes. Although this reseearch would lead to the development of the Backward Wave Oscillator and Traveling Wave Tube for military applications, Stanford was building tubes and circuits not entire systems. The labs basic research was done by graduate students or Ph.Ds doing postdoctoral internships, supervised by faculty members or hired staff (many from Fred Terman’s WWII Electronic Warfare lab.)
In 1949, with the detection of the first Soviet nuclear weapons test, the Iron Curtain falling across Europe and the fall of China to the Communists, Cold War paranoia drove the U.S. military to rearm and mobilize.
Source: Center for Arms Control and Non-Proliferation (in constant 2009 $’s)
We’ll Do Great in the Next War Early in 1950, just months before the outbreak of the Korean War the Office of Naval Research asked Fred Terman to build an Applied electronics program for electronic warfare. All branches of the military (the Air Force and Army would fund the program as well) wanted Stanford to build prototypes of electronic intelligence and electronic warfare systems that could be put into production by partners in industry. The Navy informs Terman that, “money was not a problem but time was.”
Pitching the idea to the President of Stanford, Terman enthusiastically said, “In the event of all-out war, Stanford would become one of the giant electronic research centers…” (A bit optimistic about the outcome perhaps, given that both the U.S. and the Soviet Union had nuclear weapons at this point.)
Crossing the Rubicon – The Applied Electronics Lab Setting up a separate Applied Electronics Lab for military funded programs doubled the size of the electronics program at Stanford. The new Applied Electronics Laboratory was built with Navy money and a gift from Hewlett-Packard. With the memories of WWII only five years old, and the Cold War now a shooting war in Korea, there was very little discussion (or dissension) about turning a university into a center for the production of military intelligence and electronic warfare systems.
The work in the applied program focused in fields in which faculty members or senior research associates specialized. Many of the other staff in the applied program were full-time employees hired to work solely on these military programs.
ELINT, Jammers and OTH The Applied Electronics Lab used the ideas and discoveries (on microwave tubes and receiver circuits) from Terman’s basic research program in the Electronic Research Lab. The Applied Lab would build prototypes of complete systems such as Electronic Intelligence systems, Electronic Warfare Jammers, and Over the Horizon Radar. The Applied Electronics Lab also continued work on the Klystron, pushing the tube to produce megawatts in transmitted power. (Stanford designed Klystrons producing 2½ Megawatts were manufactured by Varian and Litton would power the radar in the BMEWS (Ballistic Missile Early Warning System) built at the height of the cold war.) The close tie between the two labs was a unique aspect of the Stanford Lab. Stanford had a Customer Development loop going on inside their own lab. The discoveries in tube and circuit research suggested new electronic intelligence and countermeasure techniques and systems; in turn the needs of the Applied Lab pushed tube and circuit development. With the Applied Electronics Lab Stanford was becoming something akin to a federal or corporate lab run under university contract. The university found government contracts profitable as the government reimbursed their overhead charges (their indirect costs.) This means they could fund other non-military academic programs from this overhead.
The Stanford Applied Electronics Lab built prototypes which were handed off to the military labs for their evaluation. Subsequently military labs would contract with companies to build the devices in volume. In some cases, branches of the military contracted directly with Stanford which worked with local contractors in Silicon Valley to build these components or systems for the military. The prototype ELINT receivers built by the Applied Electronics Lab used the Stanford Traveling Wave Tubes. They quickly went into production at Sylvania Electronic Defense Labs down the street in Mountain View and Hallicrafters in Chicago. Later versions would be built by numerous industry contractors and installed on the fleet of ELINT planes orbiting the Soviet Union. These traveling wave tubes would also become the heart of the panoramic receiver used on the B-52 by the electronic warfare officer to get the bomber through the Soviet Air Defense system.
Jammers built by the Stanford Applied Electronics Lab used the Stanford Backward Wave Oscillators to produce high power microwaves. Unlike the simple noise jammers used in World War II, Soviet radars were becoming more sophisticated and newer designs were fairly immune to noise. Instead the jamming signal needed to be much smarter and have a deep understanding of how the targeted radar worked. Taking the information gleaned from our ELINT aircraft, Stanford built prototypes of jammers modulated with two new deception jamming techniques – angle jamming and range-gate pull-off. Some form of these deception jammers would eventually find their way into most electronic warfare defense systems used in the Cold War; first in the U-2, A-12 and SR-71. (Ironically the B-52 bomber, which would become the airborne leg of our nuclear triad, would use dumb noise jammers for two more decades – the Air Force opting to put the smart jammers on the B-58 and B-70, high altitude supersonic bombers – one soon obsolete and other never made it into production.)
The last major area of research that the Applied Electronics Lab group investigated was how radio signals propagated within the earth’s ionosphere. Over the next fifteen years this Radio Science Laboratory would receive the most funding of all departments in the lab (from the CIA) to build a ground based ELINT system. They would build and deploy two Over The Horizon Radar (OTHR) systems to detect Soviet and Chinese ballistic missile tests using ground based radars.
Guards at the Door – Stanford Joins the Cold War In 1953theOffice of Naval Research told Terman that all military-funded projects (basic or applied, classified or not) needed to be in their own separate physical building. As a result Stanford moved the Applied work from the Electronics Research Lab into its own building.
In 1955, the pretense of keeping unclassified and classified work separate imposed too much of an administrative overhead and Stanford merged the Applied Electronics Lab and the Electronics Research Laboratory into the Systems Engineering Lab. The Applied Electronics portion of the lab was now the size of a small company. It had 100 people, 18 of them full time faculty, 33 research associates and assistants and 33 other tube technicians, draftsman, machinists, etc. Over half this lab would hold clearances for military secrets. (Top Secret: Terman, Harris, McGhie, Secret: 44 others, Confidential: 8 others. Terman, Harris and Rambo also had Atomic Energy Commission “Q” clearances.) Some students who were getting their engineering graduate degrees wrote masters and PhD thesis that were classified. Unless you had the proper clearances you couldn’t read them. Terman and Stanford had just made a major bet on the cold war, and Stanford ranked sixth among university defense contractors.
A security guard was stationed at the door of the Applied Electronics Lab to ensure that only those with proper security clearance could enter. The law of unintended consequences meant that this most casual addition in front of a university building would result in the occupation and destruction of the lab (and its twin at MIT) and the end of the program 14 years later. (More on this in a later post.)
Show and Tell – The Stanford ELINT and Electronic Warfare Contractors Meeting During a typical year, the Applied Electronics Lab would host classified visits from military labs and defense contractors. By early 1950’s Stanford started holding a two day meeting for contractors and the military.
1955 Stanford Contractors Meeting
The 1955 attendee list gives you a feeling of the “who’s who” of the military/industrial establishment: RCA, GE, Motorola, AIL, Bendix, Convair, Mepar, Crosley, Westinghouse, McDonnell Aircraft, Douglas Aircraft, Boeing, Lockheed, Hughes Aircraft, North American, Bell Aircraft, Glen Martin, Ryan Aeronautics, Farnsworth, Sperry, Litton, Polarad, Hallicrafters, Varian, Emerson, Dumont, Maxson, Collins Radio. Other universities doing classified ELINT and Electronic Warfare work attended including University of Michigan, Georgia Institute of Technology and Cornell. Over a hundred government contractors reviewed Stanford’s work on tubes and systems.
Stanford Contractors Meeting 1955 Attendees
This was a classified conference at a university, the contractors not only got to hear the conference lectures, but also visited exhibits on the devices and systems the lab had built. The lab would repeat the conference the following week for government agencies doing military work.
Barely noticed at the 1955 conference, a year before the first transistor company opened in Silicon Valley, one of the sessions described how to use a new device called a“transistor” to build wide-band amplifiers. (Terman had sent faculty and graduate students to the University of Illinois in 1953 to learn transistor physics.)
The World Turned Upside Down The Applied Electronics Lab solidified Stanford’s lead as one of, if not the place in the U.S. military for advanced thinking in ELINT and Electronic Warfare. It would turn on its head the relationship of universities and corporations.
Traditionally universities chased corporations for funding and patronage, but the military’s dependence on Stanford’s and Fred Terman’s judgment turned that relationship on its head. Now the military was listening to Terman’s advice about which military contractors should get the order for to mass produce the Stanford systems. The contractors were now dependent on Stanford.
Terman the Rainmaker During the 1950’s Fred Terman was an advisor to every major branch of the U.S. military. He was on the Army Signal Corps R&D Advisory Council, the Air Force Electronic Countermeasures Scientific Advisory board, a Trustee of the Institute of Defense Analysis, the Naval Research Advisory Committee, the Defense Science Board, and a consultant to the President’s Science Advisory Committee. His commercial activities had him on the board of directors of HP, Watkins-Johnson, Ampex, and Director and Vice Chairman of SRI. It’s amazing this guy ever slept. Terman was the ultimate networking machine for Stanford and its military contracts.
Stanford Industrial Park – Microwave Valley Booms By the early 1950’s many of the corporations that attended the yearly Stanford Electronic Warfare conferences would establish research labs centered around Stanford for just this reason – to learn from Stanford’s basic and applied research and get a piece of the ELINT and Electronic Warfare contracting pie.
Stanford Industrial Park was the first technology office park set up to house local and out of state microwave and electronics startups. First occupied in 1953 it would include Varian, Watkins Johnson, Admiral, HP, General Electric, Kodak, Lockheed. Other east coast companies which established branches in Microwave valley in the 1950’s included IBM, Sylvania, Philco, Zenith and ITT.
The Future is Clear – Microwave Valley Forever By 1956 Fred Terman had every right to be pleased with what he had helped build in the last ten years in and around Stanford. The Stanford Electronics Lab was now the center of ELINT and Electronic Warfare.
Startups were sprouting all over Microwave Valley delivering microwave tubes and complete military systems, slowiy replacing the orchards and fruit trees. Granger Associates was a 1956 startup founded by Bill Ayer, a graduate student in the Applied Electronics Radioscience Lab, and John Granger, a former RRL researcher, building ELINT and Electronic Warfare systems (the Granger jammer was carried on the U-2.) Four years later Ayer and another Granger engineer would leave Granger and found one of the preeminent electronic warfare and ELINT companies: Applied Technologies.
The future of the valley was clear – microwaves.
1956 – Change Everything Yet in 1956 two events would change everything. At the time neither appeared earthshaking or momentous. First, a Bell Labs researcher who had grown up in Palo Alto, had his own interesting World War II career, and recently served as a military advisor on cold war weapons systems, decided to follow Fred Terman’s advice to locate his semiconductor company near Stanford.
The second was when a Southern Californian aircraft company decided to break into the missiles and space field by partnering with Stanford electronics expertise. It moved its electronics research group from Burbank to the new Stanford Industrial Park and built its manufacturing facility in Sunnyvale.
Apologies for a “Secret History” post that appeared today and now is gone from the blog. (Those of you with a reader still have it.) It was a rough draft you’ll see again when I can finish complete sentences. (Something you can appreciate if you’ve read my class text on Customer Development.)
I’m a slow learner. It took me 8 startups and 21 years to get it right, (and one can argue success was due to the Internet bubble rather then any brilliance.)
In 1978 when I joined my first company, information about how to start companies simply didn’t exist. No internet, no blogs, no books on startups, no entrepreneurship departments in universities, etc. It took lots of trial and error, learning by experience and resilience through multiple failures.
The first few months of my startups were centered around building the founding team, prototyping the product and raising money. Since I wasn’t an engineer, my contribution was around the team-building and fund raising.
I was an idiot.
Customer Development/Lean Startups In hindsight startups and the venture capital community left out the most important first step any startup ought to be doing – hypothesis testing in front of customers- from day one.
I’m convinced that starting a company without talking to customers is like throwing your time and money in the street (unless you’re already a domain expert).
This mantra of talking to customers and iterating the product is the basis of the Lean Startup Methodology that Eric Ries has been evangelizing and I’ve been teaching at U.C. Berkeley and at Stanford. It’s what my textbook on Customer Development describes.
Experiential versus Theoretical Learning After teaching this for a few years, I’ve discovered that subjects like Lean Startups and Customer Development are best learned experientially rather than solely theoretically.
Remember your parents saying, “Don’t touch the hot stove!” What did you do? I bet you weren’t confused about what hot meant after that. That’s why I make my students spend a lot of time “touching the hot stove” by talking to customers “outside the building” to test their hypotheses.
However, as hard as I emphasize this point to aspiring entrepreneurs every year I usually get a call or email from a past student asking me to introduce them to my favorite VC’s. The first questions I ask is “So what did you learn from testing your hypothesis?” and “What did customers think of your prototype?” These questions I know will be on top of the list that VC’s will ask.
At least 1/3 of the time the response I get is, “Oh that class stuff was real interesting, but we’re too busy building the prototype. I’m going to go do that Customer Development stuff after we raise money.”
Interestingly this response almost always comes from first time entrepreneurs. Entrepreneurs who have a startup or two under their belt tend to rattle off preliminary customer findings and data that blow me away (not because I think their data is going to be right, but because it means they have built a process for learning and discovery from day one.)
Sigh. Fundraising isn’t the product. It’s not a substitute for customer input and understanding.
Sometimes you need a few more lessons touching the hot stove.
In the 1950′s Stanford University’s Electronics Research Laboratory (ERL) continued to develop innovative microwave tubes for the U.S. military. This next product, the Traveling Wave Tube, would have a major impact on electronic intelligence. Stanford’s Dean of Engineering, Fred Terman, encouraged scientists and engineers to set up companies to build these microwave tubes for the military. Funded by military contracts, these 1950′s microwave tube startups would help build Silicon Valley’s entrepreneurial culture and environment.
Why Electronics Intelligence?
Starting in 1946 Electronic Intelligence aircraft (ELINT) had been probing and overflying the Soviet Union to understand their air defense system. During the 1950′s, the U.S. Air Force Strategic Air Command, U.S. Navy and the CIA were the primary collectors of tactical and operational ELINT on the Soviet PVO Strany Air Defense system. (The NSA owned COMINT collection.) They flew an alphabet soup of Air Force and Navy planes (Navy PB4Y-2′s, P2V’s, P4M’s and EA-3′s, Air Force B-17s, EC-47′s, RB-29s, RB-50′s, and the ultimate ELINT collector of the 1950′s – the RB-47H.) Common to all these planes (generically called Ferrets) is that they were loaded with ELINT receivers, manned by crews called Crows.
The Strategic Air Command needed this intelligence to understand the Soviet air defense system (early warning radars, Soviet fighter plane radar, Ground Control Intercept radar, Anti-Aircraft gun radar, and radars guiding Soviet Surface to Air Missiles.) We needed this data to build radar jammers that could make the Soviet air defense radars ineffective so our bombers with their nuclear payloads could reach their targets. The information we collected would be passed on to defense contractors who would build the jammers to confuse the Soviet air defense radars.
ELINT Tasking The ELINT program sought answers to operational questions like: What was the Radar Order of Battlea penetrating bomber would face? Were there holes in their radar coverage our bombers could sneak through? What was the best altitude to avoid the Soviet defenses? ELINT operators on each flight were tasked to gather basic data about the characteristics of the radar: is this a new type of radar or an existing one? What is its frequency, power, pulse repetition interval, rotation rate, scan rate, polarization, carrier modulation characteristics, etc. Then they would use direction finding equipment on their aircraft to locate its position.
ELINT Receivers
Early ELINT receivers were not much different then the radios you had at home – someone had to manually turn a dial to tune them to the correct frequency. By the 1950’s these receivers could automatically “sweep” a frequency band, but this action was mechanical and slow. That was fine if the Soviet radar was operating continuously, but if it was just a brief radar transmission or burst communication (which Soviet submarines used), we would probably miss hearing it. (The Soviets kept their radars turned off to stop us from recording their signals. So at times multiple ELINT planes would fly on a mission – one to run at the Soviet border appearing to attack, the other to pick up the signals from the air defense network as it responded to the intrusion. Keep in mind that 32 of these planes were shot down in the Cold War.)
The ultimate dream of ELINT equipment designers was a “high-probability of intercept” receiver, one that would pick up a signal that came up on any frequency and capture even a single pulse, however brief.
This was a two-pronged challenge: the U.S. needed receivers that could tune much faster than any of the manual methods that existed, and it needed receivers that could tune a much broader range of frequencies along the electromagnetic spectrum. Again Stanford technology would solve these challenges.
Now Stanford’s Electronics Research Laboratory delivered another tube which forever changed electronic intelligence receivers - the Traveling Wave Tube (TWT.) Invented in Britain and further developed at Bell Labs, this tube would deliver the “holy grail” for ELINT receivers - instantaneous scan speed and extremely broad frequency range. A Traveling Wave Tube (TWT) could electronically tune through microwave frequencies at 1000 times faster than any other device, and it could operate in a frequency range measured in gigahertz. As a microwave preamp, it had high gain, low noise and extremely wide bandwidth. It was perfect for a new generation of ELINT receivers to be built into the Ferret planes searching for signals around the Soviet Union. Later on TWTs would be built that could not only be used in receivers, but also actually transmit broadband microwaves at high power.
Invention Versus Commercialization While Stanford was doing its share of pure research, what’s interesting about the Electronics Research Laboratory (ERL) was its emphasis on delivery of useful products for its customers – the military – from inside a research university. The military had specific intelligence requirements and that meant that a TWT needed to be rugged enough to withstand being put on airplanes. This military/university collaboration for deliverable products is where the Electronics Research Laboratory (ERL) would excel – and ultimately end up leading to its destruction.
Traveling Wave Tube - Source: Thales Electron Devices
The Rise of “Microwave Valley” – More Stanford Tube Startups The Traveling Wave Tube generated another series of startups from Stanford’s Electronics Research Laboratory. R. A. Huggins, a research associate at the Stanford’s Engineering Research Lab, left in 1948 to start Huggins Laboratories in Palo Alto and put the first commercially manufactured traveling wave tube on the market. With a boost from military R&D contracts, Huggins Labs continued to expand, diversifying into backward-wave oscillators, low-noise TWTs, and electrostatic focused tubes. (In the 1970′s Huggins Labs sold to an east coast company, Microwave Associates (which became M/A-COM.)
Stanley Kaisel, a research associate at the Stanford ERL tube laboratory, left to join Litton’s startup. He left Litton in 1959 and started Microwave Electronics Corporation (MEC) to make low power, low noise TWTs. He sold the company to Teledyne in 1965.
Venture Capital, Microwaves and the OSS
Dean Watkinsthe leader of TWT research at Stanford’s Electronic Laboratory, left Stanford in 1957 and co-founded Watkins-Johnson (with R.H. Johnson the head of Hughes Aircraft microwave tube department) to market advanced TWTs to the military. Unlike the other Stanford tube spinouts which were funded with military contracts, Watkins-Johnson would be one of the first venture capital funded companies in the valley. Its first round of funding came from Tommy Davis (an ex-WWII OSS agent) then at the Kern County Land Company who knew Fred Terman through his military contacts. Terman and Davis negotiated the Watkins-Johnson investment and would sit on the Watkins-Johnson board together.
Frustrated with Kern’s lack of interest in investing in more technology companies, Tommy Davis would go on to found one of Silicon Valley’s first VC firms with Arthur Rock, creating Davis and Rock, founded in 1961. They would be one the first venture firms to organize their firm as a partnership rather than an SBIC or public company. They would also set the standard for the 20% carry for general partners. Tommy Davis would go on to found the Mayfield Fund in 1969.
These Stanford tube spinoffs joined the growing list of other microwave tube manufacturers in the valley including Eitel-McCullough, Varian, Litton Industries and Stewart Industries. Others would soon join them. By the early 1960s, a third of the nation’s TWT business and a substantial share of the klystron and magnetron industry was located in the Santa Clara Valley– and almost all of these companies emerged from one engineering lab at Stanford.
But microwave tubes were just the beginning of Stanford’s relationship with the military. Fred Terman was just getting warmed up. Much more was to come.
One of my first posts (here) was learning about bats, moths and electronic countermeasures in natural systems in Thailand in the middle of the War in Vietnam.
Catching up on my back issues of Science magazine all I could do was smile when I read the title of an article in the July 17th issue: Tiger Moth Jams Bat Sonar
This post makes sense in context with the previous post.
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The Korean War catapulted Stanford University’s Electronics Research Laboratory (ERL) into a major player in electronic intelligence and electronic warfare systems. Encouraged by their Dean, Fred Terman, scientists and engineers left Stanford Electronics Research Laboratory to set up companies to build microwave tubes and systems for the military. Funded by military contracts these 1950′s startups would help build Silicon Valley’s entrepreneurial culture and environment.
The Beginnings – “Vacuum Tube Valley” Ecosystem circa 1950 From its founding in 1946 Stanford’s Electronics Research Laboratory (ERL) did basic research into vacuum tubes that could operate at microwave frequencies. The research was funded and paid for by the Office of Naval Research (ONR) and later by the Air Force and Army. Much of the basic research work was done by advanced students or by recent Ph.Ds doing postdoctoral internships, supervised by Stanford engineering faculty members or senior research associates (staff.)
In a 1950 proposal to the Navy Fred Terman noted that the work that Stanford proposed “correlates almost ideally with related industrial activities in this area.” There were already “tube manufacturers in the area (Eitel-McCullough, Litton Industries, Varian Industries, Henitz and Kaufman and Lewis and Kaufman) that represented an integrated set of tube facilities for basic research, advanced development, engineering of new tubes, model shop and pilot and quantity production. And that circuit work is carried on by several organizations in the neighborhood, with Hewlett Packard Company being especially notable in this regard.” Terman was describing the valley’s already existing ecosystem for building vacuum tubes in 1950.
But unlike the majority of existing tube manufacturers in the valley who were making products for radios, Stanford Electronics Research Lab tube group had a special customer with very special needs – the U.S. Air Force and its Strategic Air Command.
So what exactly was the Electronics Research Lab designing? What were these microwave tubes? Why were they so important to the military? And what were these electronic intelligence and warfare systems used for?
Stanford Joins the Cold War - Microwave Power Tubes Stanford’s work in microwave power tubes would solve two of the Strategic Air Command’s most important cold war problems.
These 1940′s jammers (built by the wartime lab headed up by Terman and his team now at Stanford) had been built around tubes originally designed for radio applications, put out 5 watts of power. This miniscule amount of jamming power was acceptable because each WWII bomber flew in formation with hundreds of other planes, together attacking just a single target each day. The combined jamming power of all the bombers on a mission was enough to saturate and confuse German radar. But in a potentialcold war attack on the Soviet Union, our bombers were not going to fly in a massed formation to attack one target. Instead we would attack multiple targets in the Soviet Union at the same time. And while a few bombers would penetrate the periphery of the Soviet Union together, each plane — now able to carry more explosive power than all the bombs dropped in WWII — would approach its target individually. As a result of this change in strategy (and explosive capacity), each bomber had to supply enough jamming power to defend itself.
B-47 - primary Strategic Air Command Bomber in the 1950's
As a result, to protect its bombers flying over the Soviet Union the U.S. Air Force needed power tubes that had hundreds of times more power than WWII devices.
The U.S. Air Force also needed improvements in frequency agility to protect its cold war bombers. Frequency agility can be best described by what happened over Germany in WWII. As the allies jammed Germany radar, the Germans tried to avoid the effect of jamming by changing the frequency on which their radars transmitted. This was possible since the jammers in U.S. planes’ could only transmit on a narrow band of frequencies (providing spot jamming) and could not be retuned in the air. To cover all the possible frequencies German radars might be operating on, allied technicians pretuned the jammers before each bomber raid so that each plane transmitted on a different frequency. The combined effect of hundreds of planes in the bomber stream was to cover a broader frequency range than one jammer could by itself. (This technique of covering a broad range of frequencies was known as barrage jamming.)
(A good Radar tutorial is here, on the Radar Range equation here and Electronic Warfare tutorial is here. The links will download PowerPoint presentations.)
But nuclear warfare over the Soviet Union in the 1950′s meant that a single bomber needed jammers that could cover multiple frequencies, and could be tuned instantaneously. Not only did the US need more more powerful microwave power tubes, the power tubes had to be frequency agile, (able to be tuned in the air to different frequencies) to jam the Soviet radars. (For example, the Soviet P-20 Token was an early warning radar our bombers would encounter. It transmitted on 5 different frequencies over a band 300mhz wide. To jam it, all five frequencies had to be jammed at the same time. Our WWII jammers couldn’t do the job.)
Terman’s Systems Engineering Research Lab at Stanford would develop microwavepower tubes thatoffered a solution to both challenges and would be a a game changer for electronic warfare at the time.
High Power, Instant Tuning – Stanford’s contribution Stanford’s Electronics Research Laboratory first contribution to high power microwave tubes for airborne electronic warfare in the 1950’s was the Backward Wave Oscillator (BWO). Stanford engineers realized that this tube, which had been invented in France, could electronically tune through microwave frequencies while producing almost a 1,000 watts of power – (equivalent to the output of 200 jammers over Germany in WWII.) Perfecting this tube for use as an airborne jammer became one of the labs primary objectives.
This was a critical development to support the new tactics of single bombers penetrating the Soviet Union. Equipping a bomber with several jammers built around Backward Wave Oscillator could give it enough power to use barrage jamming against multiple radars and get it through to its target. Stanford gave its Backward Wave Oscillator design drawings to tube manufacturers throughout the U.S. By the 1960′s, the U.S. Air Force would ultimately equip its B-52 bombers with 6,000 jammers using these these oscillators.
The Rise of “Microwave Valley” Stanford Tube Spinouts
A technician in Stanford’s ERL tube shop, Ray Stewart, thought he could build these Backward Wave Oscillators commercially, and left to start Stewart Engineering in Scotts Valley near Santa Cruz. The company had more orders from the military than it could handle. (Stewart would sell his company to Watkins Johnson, one of the most financially successful of the Stanford microwave tube spinoffs. More about Watkins-Johnson in the next post.) Stewart joined a growing list of other microwave startups beginning to populate the valley.
One of the early microwave spinouts from Stanford was built around a microwave power tube called the Klystron, invented by Terman’s students Russell and Sigurd Varian and William Hansen. In 1948 the Varian brothers along with Stanford professors Edward Ginzton and Marvin Chodorow founded Varian Corporation in Palo Alto to produce klystrons for military applications. (Fred Terman and David Packard of HP joined Varian’s board.) While the Klystrons of the 1950’shad too narrow and bandwidth and were too large for airborne use, they could be scaled up to generate megawatts of power and were used to power the U.S. ground-based Ballistic Missile Early Warning System (BMEWS) radars (and the Stanford Linear Accelerator.)
Another of Terman’s students, Charles Litton, would start several Silicon Valley companies, and in the 1950’s Litton Industries would become the leader in pulse and continuous wave magnetrons used in jammers and missiles. Magnetrons were the first high power microwave device invented in WWII. Used in radars systems and missiles, magnetrons could producehundreds of watts of power.
More to Come These first microwave tubes were just the beginning of a flood of innovativeproducts for the military. The next Stanford tubes and systems would revolutionize the Electronic Intelligence aircraft that were circling (and flying over) the Soviet Union.
These next series of posts chronicles the untold story of how one professor returning from one war decides to enlist Stanford University in waging the next one and by accident, laid the foundation for Silicon Valley, venture capital and entrepreneurship as we know it today.
These posts cover two distinct periods – the first, the rise of “Microwave Valley” chronicles the decade of 1946-1956 as Stanford University became the hub of military/industry contracting in the Bay Area.
The second series of posts, the rise of “Spy Satellite Valley,” starts in 1956 with two game changing events– one very public – the valley’s first semiconductor company and one very, very private – the valley as the home of the first optical and ELINT spy satellites and submarine-launched ballistic missiles. The story ends in 1969 with campus riots at Stanford.
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These posts will make a lot more sense if you look at the earlier Secret History posts. If you read only one previous post, read this one (or this one.)
————- The Birth of Entrepreneurship in The Hot Cold War Silicon Valley entrepreneurship was born in the middle of a secret war with the Soviet Union. It’s a war you probably never heard of since most of it was classified, and both parties never wanted it public lest it got out of hand. Yet it was a war in which tens of thousands of Americans fought and hundreds died. Frederick Terman, Stanford’s Dean of Engineering, enlisted Stanford University as a major arms suppliers in this war. In doing so he accidentally launched entrepreneurship in Silicon Valley – with the help of the U.S. military, the CIA and the National Security Agency.
Stanford as a Center of Microwave and Electronics In 1946 after running the military’s secret 800 person Electronic Warfare Lab at Harvard, Fred Terman returned to Stanford as the dean of the engineering school. Terman’s goal was to build Stanford’s electrical engineering department into a center of excellence focused on microwaves and electronics. Having already assembled one of most advanced electronic labs in World War II, Terman was one of the few academics who could do it.
Fred Terman
Terman’s first step was to recruit 11 former members of his staff from the Harvard Radio Research Lab — “Congratulations, you’re now Stanford faculty.” Not only were they all great researchers, but they also had just spent three years building electronic warfare systems that were used in World War II. They would become the core of Stanford’s new Electronics Research Lab (ERL.) While officially in the electrical engineering department, the lab reported directly to Terman.
Next, Terman used his military contacts to secure funding for the Lab from the Office of Naval Research, the Air Force and the Army Signal Corps. (Although the country had returned to peace, some in the military wanted to preserve our ability to fight the next war.) By 1947 the U.S. military was funding half of Stanford’s engineering school budget. Terman proudly pointed out that only Stanford, MIT and Harvard had a military sponsored electronics program.
Stanford Leads in Electronic Intelligence and Electronic Warfare In the 1950’s Stanford Engineering Research Lab (ERL) made major contributions to electronic intelligence and electronic warfare. Its basic research focused on three areas: microwave receiving and transmitting tubes, radar detection and deception techniques and understanding the earth’s ionosphere.
Stanford became one of the leading research centers in advancing the state of microwave tubes including the klystron which could provide high-power microwave in pulses, magnetrons which could provide continuous wave microwave power, and backward wave oscillators and traveling wave tubes – both electronically tunable microwave tubes.
Stanford’s research on the earth’s ionosphere would lead to meteor-burst communication systems and Over the Horizon Radar used by the NSA and CIA to detect Soviet and Chinese missile tests and ultimately to the research that made Stealth technologies possible.
Its studies in radar detection and deception techniques would lead Stanford to the applied part of it mission. Stanford would build prototypes of electronic intelligence receivers (high probability of intercept/rapid scan receivers) for use by the military. These applied systems were prototypes of the jamming devices found on our bombers and receivers found in NSA ground stations and the fleet of ELINT aircraft flying around and in the Soviet Union and later on in the U-2, SR-71 and ELINT ferret subsatellites.
Later posts will talk about these technologies and the startups that spun out of Stanford to build them. But first, to understand what happened at Stanford and in Silicon Valley under Fred Terman, some context about the Cold War is helpful. (Skip the next section if you’re a history major.)
The Cold War After World War II ended, our wartime ally the Soviet Union kept its army in Eastern Europe and forcibly installed Communist governments in its occupied territories. Meanwhile the U.S. demobilized its army, sent its troops home, scrapped most of its Air Force and mothballed almost all its Navy. As tensions rose, there was a growing fear that the Soviets could invade and occupy all of Western Europe.
In 1949, the Soviets exploded their first nuclear weapon and ended the U.S monopoly on atomic weaponry. That same year China fell to the communists under Mao Zedong, and the Nationalist government retreated to Taiwan. A year later the Korean War turned the cold war hot, as communist North Koreans attacked and overran most of South Korea (except for a small defensive perimeter in the south.) American and United Nations troops entered the war fighting North Koreans and then Communist Chinese ground troops, and Soviet fighter pilots for three years. 34,000 U.S. soldiers died in battle.
To the U.S. the Soviet Union seemed bent on world conquest with Korea just a warm-up for an atomic war with massive casualties. (This was not an unreasonable supposition after a conventional world war which had left 50 million dead.) Faced with the reality of the Korean War, the U.S. began to rebuild its military. But now the Soviet Union was its target enemy, and nuclear weapons had become the principal instrument of offense. Instead of rebuilding its WWII forces, the U.S. military embraced new technologies (jets, electronics, missiles, nuclear subs) and built entirely new weapon systems (bombers with nuclear weapons, ICBMs, SLBM’s) for a new era of international conflict.
Stanford’s Electronic Research Lab (ERL) which had focusedon basic research on microwave tubes from 1946 was about to scale up for the Cold War.
Smarter Intelligence One of the major differences between the war with Germany and the cold war confrontation with the Soviet Union had to do with access. The Soviet Union was a closed country. Unlike Germany in World War II, the U.S. could not fly across the Soviet Union to learn how their defenses were set up. We did not have radar maps of their cities. The Soviet’s secrecy fed our cold war paranoia. The U.S. was determined to find out what was going on inside. And the way we were going to do it was with electronic/signals intelligence.
But the technology that supported intelligence gathering against our WW II enemies was not sufficient to penetrate the Soviet Union. The U.S. military had to develop new ways to collect intelligence. The engineering department and labs that Fred Terman established at Stanford University would play a key role in advancing electronic intercept and jamming technology to support the more sophisticated intelligence systems that the Cold War required.
The Air Force Needs to Know By the Korean War, U.S. policy held that the Air Force, carrying nuclear weapons into the Soviet Union, would be the means to fight World War III.
Through World War II, the U.S. Air Force had been a part of the U.S. Army. It split off into a separate service in 1947. By the 1950’s, the Strategic Air Command (SAC) had become the U.S. Air Force’s long range bombing arm and the designated instrument of Armageddon.
On the other side of the Iron Curtain, the defense of the Soviet Motherland lay with the Soviet Air Defense Forces, called PVO Strany, a separate branch of the Soviet military formed in 1948 designed to detect U.S. bomber raids, target and aim radar-guided weapons and destroy the U.S. bombers.
Example of Early Warning Radar Coverage – Japan in WWII
SAC needed intelligence to understand the components of the PVO Strany air defense system in order to shut them down and make them ineffective so our bombers with their nuclear payloads could reach their targets. (The information we collected would be passed on to contractors who would build jamming devices the bombers would carry.) It sought answers to tactical questions like: What was the Radar Order of Battlea penetrating bomber would face? (Were there holes in their radar coverage our bombers could sneak through? What was the best altitude to avoid the Soviet defenses?) What were the different types of Soviet fighter planes? How many? How effective? What about the anti-aircraft (AAA) gun defenses? In addition the Soviets were adding a new type of defensive radar-guided weapon called the Surface to Air Missile (SAM).
Example of Jammer versus Radar Coverage - Allied Jammers over Germany in WW11
The Strategic Air Command also needed to know what the navigational waypoints and the target would look like on their air-to-ground bombing radars. (These radars painted a map-like picture of the ground and prior to GPS, this is how bombers navigated their way to the target.)
And on top of all this the Strategic Air Command needed to understand the current state of the Soviet Air Defense Force readiness and deployment updated on a daily basis.
The CIA Needs to Know While the Air Force was working on collecting intelligence to execute their tactical missions, the CIA, founded in 1947, was responsible for providing U.S. political leadership with a much bigger picture. They developed the National Intelligence Estimate – a series of reports which summarized their judgment about the size of the Russian threat. Also seeking to learn more about the Soviet Union’s offensive weapon systems, the CIA wanted intelligence to help them understand: What type of strategic bombers did the Soviets have? How many did they have? How would they reach the U.S.? How would we know if they were coming? (Have they moved to their forward operating bases in the Artic?) The same was true about the Soviet defensive systems – how many fighters would they build and of what type? How many Surface to Air Missiles – what was their range and accuracy?
And by the mid 1950’s the Soviets were testing ballistic missiles, both intermediate range that could reach Europe and intercontinental range that could reach the U.S. Whatwas their range? What was their accuracy? How big of a nuclear warhead could they carry (throw weight and yield)? The military needed to answer these same questions about the nuclear armed missiles the Soviets were putting on their submarine force.
To give our leadership an estimate of the Soviet’s nuclear production capacity, the CIA also had to estimate how many nuclear weapons could the Soviet Union make. Where were their production facilities? What was the yield of the weapons and their weight and size?
Throughout the 1950′s the CIA’s Office of Scientific Intelligence was heavily involved in the development of Electronics Intercept and Electronic Warfare Intelligence – and Stanford and the emerging startups around it would provide the systems and concepts to help.
The NSA and ELINT In the 1950’s the Strategic Air Command and the U.S. Navy were the airborne ELINT assets for the U.S. Beginning in the mid/late 1950’s the National Security Agency (NSA) starting taking more and more responsibility for collection – first in communications intelligence, then in signals and telemetry intelligence. The NSA ultimately built up hundreds of ground stations, satellites and aircraft manned by tens of thousands servicemen (under the cover of the Air Force Security Service, Army Security Agency and the Naval Security Group.)
The “Hot” Cold War Remember the Soviet Union was a closed country. To collect the intelligence to answer its questions about the Soviet threat, the U.S. military resurrected the signals Intelligence lessons and skills we invented in World War II. Starting in 1946 ELINT aircraft had been probing and overflying the Soviet Union. SAC, the CIA, the Navy and our British allies flew modified planes called Ferrets around the periphery of the Soviet Union to understand their air defense system (the crews were called Crows). (What isn’t well known is that the U.S. and Britain flew planes on deep penetration missions into and across the Soviet Union numerous times – well before a U-2 spy plane was shot down over the Soviet Union in 1960.)
British Canberra PR3 - Overflew Kapustin Yar 1953
The Air Force adopted a cover story that these were weather data gathering missions. These flights were no secret to the Soviets, (given the sheer number of surveillance flights around the Soviet Union it’s surprising they didn’t need their own air traffic control system,) and they started to protest diplomatically in 1948. When our flights continued, the Soviets took direct action. In 1950, two months before the Korean War started, the Soviets shot down an ELINT plane over the Baltic. All ten crew members were killed. This was the beginning of a Soviet policy to stop ignoring incursions. They would attempt to force the ELINT planes to land in the Soviet Union or they would destroy them. Every year through the the 1950′s and the early ’60′s the Soviets attacked and shot down at least one of our ELINT ferret aircraft. This was a deadly game.
pb4y-2 Privateer Navy ELINT
We kept on probing their defenses convinced that it was in our national interest to continue. The low-level conflict continued until the height of the Cuban Missile Crisis when the local Soviet commander shot down a U-2 over Cuba. Both countries realized that a miscalculation could have been a catalyst for World War III and the Soviets stop attacks on U.S. spyplanes. (The Communist Chinese continued to shoot down U-2′s flown by Nationalist Chinese pilots until 1970, and the Soviet Union accidently attacked two Korean airline passenger planes in the Far East, one damaged in 1978 and one destroyed in 1983.)
During the Cold War 32 U.S. ELINT planes were shot downby Soviet pilots with 225 U.S. airmen killed. (The numbers vary depending on the sources you read.) Regardless of the number, this was a deadly shooting war.
Stanford and an emerging set of Silicon Valley startups would be deeply involved in designing the technologies, techniques and ELINT systems on these planes. Microwave Valley was about to take off.
The most important early customers for your startup usually turn out to be quite different from who you think they’re going to be.
He’s Only in Field Service
When I was at Zilog, the Z8000 peripheral chips included the new “Serial Communications Controller” (SCC). As the (very junior) product marketing manager I got a call from our local salesman that someone at Apple wanted more technical information than just the spec sheets about our new (not yet shipping) chip. I vividly remember the sales guy saying, “It’s only some kid in field service. I’m too busy so why don’t you drive over there and talk to him.” (My guess is that our salesman was busy trying to sell into the “official” projects of Apple, the Lisa and the Apple III.)
Zilog was also in Cupertino near Apple, and I remember driving to a small non-descript Apple building at the intersection of Stevens Creek and Sunnyvale/Saratoga. I had a pleasant meeting and was as convincing as a marketing type could be to a very earnest and quirky field service guy, mostly promising the moon for a versatile but then very buggy piece of silicon. We talked about some simple design rules and I remember him thanking me for coming, saying we were the only chip company who cared enough to call on him (little did he know.)
I thought nothing about the meeting until years later. Long gone from Zilog I saw the picture of the original Macintosh design team. The field service guy I had sold the chip to was Burrell Smith who had designed the Mac hardware.
The SCC had been designed into the Mac and became the hardware which drove all the serial communications as well as the AppleTalk network which allowed Macs to share printers and files.
Some sales guy who was too busy to take the meeting was probably retired in Maui on the commissions.
Your Customers are Not Who You Think For years I thought this “million unit chip sale by accident” was a “one-off” funny story. That is until I saw that in startup after startup customers come from places you don’t plan on.
Unfortunately most startups learn this by going through the “Fire the first Sales VP” drill: You start your company with a list of potential customers reading like a “who’s who” of whatever vertical market you’re in (or the Fortune 1000 list.) Your board nods sagely at your target customer list. A year goes by, you miss your revenue plan, and you’ve burned through your first VP of Sales. What happened?
What happened was that you didn’t understand what “type of startup” you were and consequently you never had a chance to tailor your sales strategy to your “Market Type.” Most startups tend to think they are selling into an Existing market – a market exists and your company has a faster and better product. If that’s you, by all means hire a VP of Sales with a great rolodex and call on established mainstream companies – and ignore the rest of this post.
Market Type
But most startups aren’t in existing markets. Some are resegmenting an existing market–directed at a niche that an incumbent isn’t satisfying (like Dell and Compaq when they were startups) or providing a low cost alternative to an existing supplier (like Southwest Airlines when it first started.) And other startups are in a New Market — creating a market from scratch (like Apple with the iPhone, or iPod/iTunes.)
(“Market Type” radically changes how you sell and market at each step in Customer Development. It’s one of the subtle distinctions that at times gets lost in the process. I cover this in the Four Steps to the Epiphany.)
Five Signs You Can Sell to a Large Company
If you’re resegmenting an existing market or creating a new market, the odds are low that your target list of market leaders will become your first customers. In fact having any large company buy from you will be difficult unless you know how to recognize the five signs you can get a large company to buy from a startup:
They have a problem
They know they have a problem
They’ve been actively looking for a solution
They tried to solve the problem with piece parts or other vendors
They have or can acquire a budget to pay for your solution
I advise startups to first go after the companies thataren’t the market leaders in their industries, but are fighting hard to get there. (They usually fit the checklist above.) Then find the early adopter/internal evangelist inside that company who wants to gain a competitive advantage. These companies will look at innovative startups to help them gain market share from the incumbent.
Sell to the Skunk Works
The other place for a startup to go is the nooks and crannies of a market leader. Look for some “skunk works” project where the product developers are actively seeking alternatives to their own engineering organization. In Apple’s case Burrell Smith was designing a computer in a skunk works unbeknownst to the rest of Apple’s engineering. He was looking for a communications chip that could cut parts cost to build an innovative new type of computer – which turned out to be the Mac.
Lessons Learned
Early customers are usually not where you first think they are
Where they are depends on Market Type
Look for aggressive number 2′s or 3′s who are attacking a market leader
Look for a “skunk works” inside a market leader
an early version of this story appeared on folklore.org
Once I recovered from burnout at Zilog, I was working less and accomplishing more. I even had time to find a girlfriend who was a contractor to the company. One of her first comments was, “I didn’t know you even worked here. Where were you hiding?” If she only knew.
What’s the Worst that Can Happen?
Our small training department had been without a manager for months and finding a replacement didn’t seem to be high on the VP of Sales list. We four instructors would grumble and complain to one another about our lack of leadership. Then it hit me – no one else wanted to be manager – what was the worst that could happen? I walked into the VP of Sales’ office and with my knees trembling, I politely asked for the job. I still remember him chuckling as I nervously babbled on what I good job I would do, what I would change for the better in the department, why I was qualified, etc. He said, “you know I figured it would be you to come in here and ask for the job. I was wondering how long it would take you.” I was now manager of Training and Education at Zilog.
All I had to do was ask.
Zilog Correspondence Course Matchbook
From that day forward, in my business and personal relationships, I would calculate the consequences of a “No” for an answer against the benefits of getting a “Yes.” The math said that it was almost always worth asking for what you want. And the odds in your favor are even higher, as most of your peers wouldn’t even get into the game due to some unspoken belief that in a meritocracy, good things will come to those who wait. Perhaps if you have a union job based on seniority, but not in any startup I’ve ever seen.
For entrepreneurs good things come to those who ask.
What’s Marketing? As part of the sales organization, I thought I kind of figured out what the function of the sales department was. (In reality it would be another 20 years.) And I understood engineering since I interacted with them almost daily. And since Zilog still had a semiconductor fab next door, I learned what manufacturing did in a chip company, as every training class wanted to see their chips being made. But the one group that had me stumped was something called “marketing.” ”Explain it to me again,” I’d ask.
After a year and a half of running training and teaching the new Z-8000 and its peripheral chips, I began to figure out that one of the jobs of marketing was to translate what engineering built into a description that our salesmen could use to talk to potential customers. I distinctly remember this is the first time I head the phrases “features and benefits.” And since I saw our ads (but didn’t quite understand them,) I knew marketing was the group that designed them, somehow to get customers to think our products were better than Intel and Motorola’s.
One day I heard there was an opening in the marketing department for a product marketing manager for the Z-8000 peripheral chips. The department had hired a recruiter and was interviewing candidates from other chip companies. I looked at the job spec and under “candidate requirements” it listed everything I didn’t have: MBA,
5-10 years product marketing experience, blah, blah.
I asked for the job.
The response was at first less than enthusiastic. I certainly didn’t fit their profile. However, I pointed out that while I didn’t have any of the traditional qualifications I knew the product as well as anyone. I had been teaching Z8000 design to customers for the last year and a half. I also knew our customers. I understand how our products were being used and why we won design-in’s over Intel or Motorola. And finally, I had a great working relationship with our engineers who designed the chips. I pointed out it that it would take someone else 6 months to a year to learn what I already knew – and I was already in the building.
A week later Zilog had a new product marketing manager, and I had my first job in marketing.
Now all I needed to do was to learn what a marketeer was supposed to do.
MBA or Domain Expert Years later when I was running marketing departments I came up with a heuristic that replicated my own hire: in a technology company it’s usually better to train a domain expert to become a marketer than to train an MBA to become a domain expert. While MBA’s have a ton of useful skills, what they don’t have is what most marketing departments lack – customer insight. I found that having a senior marketer responsible for business strategy surrounded by ex-engineers and domain experts makes one heck of a powerful marketing department.
Entreprenuers Know How to Ask Successful entrepreneurs have the ability to ask for things relentlessly. In the face of rules that stand in their way they find a way to change the rules. (To an entrepreneur comments like, “you need an MBA, we don’t fund companies like yours, we don’t buy from start-ups, you have to go through our vendor selection committee” are just the beginning of a negotiation rather than the end.) Entrepreneurs are fearless, persistent and uninhibited about asking – whether it’s asking to assemble a team, get financing, sell customers, etc. or whatever is necessary to build a company. If you are on the path to be a successful entrepreneur, hopefully you are already asking for things you want/need/aspire to. If not, don’t wait. Get started asking. It is a skill you need to either have or develop.
Lessons Learned
Ask, and it shall be given you; seek, and you shall find; knock, and it will be opened to you.
At Zilog I was figuring out how to cope with job burnout. And one of my conclusions was that I needed to pick one job not two. I had to decide what I wanted to do with my career – go back to ESL, try to work for the Customer, or stay at Zilog?
While it may seem like an easy choice, few people who love technology and who work on black projects leave. These projects are incredibly seductive. Let me explain why.
National Efforts In World War II the U.S. put its resources behind a technical project that dwarfed anything every built – the atomic bomb. From a standing start in 1942 the U.S. scaled up the production of U-235 and plutonium from micrograms to tens of kilograms by 1945. We built new cities in Hanford, Oak Ridge and Los Alamos and put 130,000 people to work on the project.
During the cold war, the U.S. government kept up the pace. Hundreds of thousands of people worked on developing strategic weapons, bombers, our ICBM and SLBM missile programs, and the Apollo moon program. These programs dwarfed the size that any single commercial company could do by itself. They were national efforts of hundreds of companies employing 10’s or 100’s of thousands of engineers.
ESL – National Technical Means of Verification
The project I was working on at ESL fit this category. The 1970’s and ‘80’s were the endgame of the cold war, and the U.S. military realized that our advantage over the Soviet Union was in silicon, software and systems. These technologies which allowed the U.S. to build sensors, stealth and smart weapons previously thought impossible or impractical, would give us a major military advantage. Building these systems required resources way beyond the scope of a single company. Imagine coming up with an idea that could work only if you had your own semiconductor fab and could dedicate its output to make specialized chips just for you. Then imagine you’d have to get some rockets and put this reconnaissance system in space – no, make that several rockets. No one laughed when ESL proposed this class of project to “the customer.”
If you love technology, these projects are hard to walk away from.
The Road Not Taken At first, I thought my choice was this: working on great technology at ESL or continuing to work on these toy-like microprocessors at Zilog.
But the more I thought about it, the choice wasn’t about the hardware or systems. There was something about the energy and passion Zilog’s customers had as they kept doing the most unexpected things with our products.
While I couldn’t articulate at it at the time (it would take another 25 years) at ESL the company and the customer had a known problem and were executing to building a known solution, with a set of desired specifications and PERT charts telling them what they needed to do and in what order to achieve the goal. There was a ton of engineering innovation and coordination along the way, and the project could have failed at any point. But the insight and creativity occurred at the project’s beginning when the problem and solution was first being defined. Given where I was in the hierarchy, I calculated that the odds of me being in on those decisions didn’t look high – ever.
In contrast, my customers at Zilog had nothing more than a set of visions, guesses and hallucinations about their customers; who they were, what they wanted to achieve and what was the right path to get there. At these startups both theproblem and solution were unknown.
Startups were not just smaller versions of a large company, they were about invention, innovation and iteration - of business model, product, customers and on and on. Startups were doing discovery of the problem and solution in real-time. I could see myself doing that – soon.
Unbeknownst to me, I was facing a choice between becoming an entrepreneur or working for a large company.
I chose a path and never looked back.
——
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;
Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,
And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
Robert Frost – The Road Not Taken – 1916
Lessons Learned
There is no “right” choice for a career
There’s only the choice you make
Don’t let a “career” just happen to you
A startup is not a smaller version of a large company
If you hang around technology companies long enough, you or someone you know may experience “burnout” – a state of emotional exhaustion, doubt and cynicism. Burnout can turn productive employees into emotional zombies and destroy careers. But it can also force you to hit the pause button and perhaps take a moment to reevaluate your life and your choices.
Hitting “burnout” changed the trajectory of both ends of my career in Silicon Valley. This post, which is divided in two parts, is the story of the first time it happened to me.
Zilog Zilog was my first Silicon Valley company where you could utter the customer’s name in public. Zilog produced one of the first 8-bit microprocessors, the Z-80 (competing at the time with Intel’s 8080, Motorola 6800, and MOS Technology 6502.)
I was hired as a training instructor to teach microprocessor system design for the existing Z-80 family and to write a new course for Zilog’s soon to be launched 16-bit processor, the Z-8000. Given the hardware I had worked on at ESL, learning microprocessors wasn’t that hard but figuring out how to teach hardware design and assembly language programming was a bit more challenging. Luckily while I was teaching classes at headquarters, Zilog’s field application engineers (the technical engineers working alongside our salesmen) would work side-by-side with our large customers as they designed their systems with our chips. So our people in the field could correct any egregious design advice I gave to customers who mattered.
Customers The irony is that Zilog had no idea who would eventually become its largest customers. Our salesmen focused on accounts that ordered the largest number of chips and ignored tiny little startups that wanted to build personal computers around these chips (like Cromemco, Osborne, Kaypro, Coleco, Radio Shack, Amstrad, Sinclair, Morrow, Commodore, Intertec, etc.) Keep in mind this is still several years before the IBM PC and DOS. And truth be told, these early systems were laughable, at first having no disk drives (you used tape cassettes,) no monitors (you used your TV set as a display,) and no high level programming languages. If you wanted your own applications, you had to write them yourself. No mainframe or minicomputer company saw any market for these small machines.
Two Jobs at Once When I was hired at Zilog part of the deal was that I could consult for the first six months for my last employer, ESL.
Just as I was getting settled into Zilog, the manager of the training department got fired. (I was beginning to think that my hiring managers were related to red-shirted guys on Star Trek.) Since the training department was part of sales no one really paid attention to the four of us. So every day I’d come to work at Zilog at 9, leave at 5 go to ESL and work until 10 or 11 or later. Repeat every day, six or seven days a week.
Meanwhile, back at ESL the project I was working on wanted to extend my consulting contract, the company was trying to get me to return, and in spite of what I had done on the site, “the customer” had casually asked me if I was interested in talking to them about a job. Life was good.
But it was all about to catch up to me.
Where Am I? It was a Friday (about ¾’s through my work week) and I was in a sales department meeting. Someone mentioned to me that there were a pile of upcoming classes heading my way, and warned me “remember that the devil is in the details.” The words “heading my way” and “devil” combined in my head. I immediately responded, “well that’s OK, I got it under control – as long as the devil coming at me isn’t an SS-18.” Given that everyone in the room knew the NATO codename for the SS-18 was SATAN, I was thinking that this was a witty retort and expected at least a chuckle from someone.
I couldn’t understand why people were staring at me like I was speaking in tongues. The look on their faces were uncomfortable. The VP of Sales gave me a funny look and just moved on with the agenda.
VP of Sales? Wait a minute.. where am I?
I looked around the room thinking I’d see the faces of the engineers in the ESL M-4 vault, but these were different people. Who were these people? I had a moment of confusion and then a much longer minute of panic trying to figure out where I was. I wasn’t at ESL I was at Zilog. As I realized what I had said, a much longer panic set in. I tried to clear my head and remember what else I had said, like anything that would be really, really, really bad to say outside of a secure facility.
As I left this meeting I realized I didn’t even remember when I had left ESL or how I had gotten to Zilog. Something weird was happening to me. As I was sitting in my office looking lost, the VP of Sales came in and said, “you look a bit burned out, take it easy this weekend.”
“Burned out?” What the heck was that? I had been working at this pace since I was 18.
Burnout I was tired. No I was more than tired, I was exhausted. I had started to doubt my ability to accomplish everything. Besides seeing my housemates in Palo Alto I had no social life. I was feeling more and more detached at work and emotionally drained. Counting the Air Force I had been pounding out 70 and 80 hour weeks nonstop for almost eight years. I went home and fell asleep at 7pm and didn’t wake up until the next afternoon.
The bill had come due.
Recovery That weekend I left the Valley and drove along the coast from San Francisco to Monterey. Crammed into Silicon Valley along with millions of people around the San Francisco Bay it’s hard to fathom that 15 air miles away was a stretch of California coast that was still rural. With the Pacific ocean on my right and the Santa Cruz Mountains on my left, Highway 1 cut through mile after mile of farms in rural splendor. There wasn’t a single stop-light along 2-lane highway for the 45 miles from Half Moon Bay to Santa Cruz. Looking at the green and yellows of the farms, I realized that my life lacked the same colors. I had no other life than work. While I was getting satisfaction from what I was learning, the sheer joy of it had diminished.
As the road rolled on, it dawned on me that there was no one looking out for me. There was no one who wasgoing to tell me, “You’ve hit your limit, now work less hours and go enjoy yourself.”The idea that only I could be responsible for taking care of my happiness and health was a real shock. How did I miss that?
At the end of two days I realized,
This was the first full weekend I had taken off since I had moved to California
3 years ago.
I had achieved a lot by working hard, but the positive feedback I was getting just encouraged me to work even harder.
I needed to learn how to relax without feeling guilty.
I needed a life outside work.
And most importantly I needed to pick one job not two. I had to make a choice about where I wanted to go with my career–back to ESL, try to work for the Customer or stay at Zilog?
More about that choice in the next post.
Lessons Learned
No one will tell you to work fewer hours
You need to be responsible for your own health and happiness
Burnout sneaks up on you
Burnout is self-induced. You created it and own it.
What Business Are We In? While the Rocket Science press juggernaut moved inexorably forward, a few troubling facts kept trying to bubble up into my consciousness. The company was founded to build games with embedded video to bring Hollywood stories, characters, and narratives to a market where “shoot and die” twitch games were in vogue. But underlying the company’s existence was a fundamental hypothesis we refused to see or test - customers would care if we did.
In the game business of the early 1990’s video was at best a brief narrative, a distraction you maybe watched once, not the core of the game. Our potential customers didn’t seem to be calling for Hollywood stories, characters and narrative. That’s OK, because we knew better. We thought we had figured out what the next generation of games was going to be. We were thinking we were in the movie business, but video games were more akin to pinball; both pinball and movies were entertainment but you would never confuse them with each other. Successful pinball companies didn’t hire Hollywood talent.
Meanwhile our company was pouring an enormous amount of dollars into building tools and video compression technology, while also hiring a lot of high-priced Hollywood talent like art directors, and script and story editors.
We Don’t Need Domain Experts When I looked around at our executive staff, there wasn’t a single founder who was a gamer. Worse, there wasn’t a single person on our executive team who had come from a game company. Nor was there anyone with game experience on our board. As the company grew a sense of unease started gnawing at the outer fringes of the “you’re in trouble” part of my brain. Meanwhile my partner was in heaven working with his newly hired group of game designers directing and producing our first games. When I pointed out my rising apprehension his response was, “I’ve been playing games since I was 10. I know what’s great and what’s not. We agreed this part of the company was my responsibility. Don’t worry the games are going to be great.” Given my fiduciary responsibility to my board and my investors did his blasé answer force me to grab him by the collar and scream, “Snap out of it, we’re in trouble!”
Nah. Instead I said, “Oh, OK, glad it’s all under control.” Then I went back to raising more money and getting more press for our soon to be spectacular games.
Hire Advice I Can Ignore But the nagging little voice in the back of my head that said, “This doesn’t feel right,” wouldn’t go away. So I hired a VP of Marketing from Sega, one of the video game platforms on which our games would run. After only two weeks on the job, he came into my office and said, “Have you’ve seen the games we are building?” What kind of question was that? Of course I had seen pieces of the video we shot and beautiful storyboards. “No,” he insisted, “Have you seen the game play, the part that supposed to keep players addictively glued to the game console for hours?” Hmm. “No, not really, but my partner owns the studio and tells me it’s spectacular and everyone will love it. Don’t bother him; he knows what he’s doing. Go spend some time outside the building talking to potential distribution partners. Tell them how great it’s going to be and see how many pre-orders we can get.”
A month later the VP of Marketing appeared in my office again. “Steve I have to tell you some bad news, I just showed our potential channel partners and customers a few completed pieces of the games we had. They think the games stink.”
Now I know I heard his words because years later I can still remember them well enough to write them down. But somehow the translation between my ears and what I was supposed to do with what I was hearing shut down. Was my response to stop development of the games? Bring in some outside professionals to review our progress? Call a board meeting and say we may have a serious problem? Nah. I said, “That can’t be true! The press is saying we are the hottest super group around. Look, we’re on the cover of Wired magazine. They think we’re brilliant. Our VCs think we are visionary. Stop annoying our game designers and start working on selling and marketing the games.”
Hindsight In hindsight it’s easy to laugh. Saying you knew how to build great games because you played them all your life was like saying, “Hey I eat out a lot so why don’t I open a restaurant.” Or “I’ve seen a lot of movies so let’s start a movie studio.” Only in Silicon Valley could we have got funded with this idea, and not surprisingly, it was our technology that had the VC’s confused. It was more like we had invented the world’s best new kitchen utensils and wanted to open a restaurant, or had built the world’s finest movie cameras and wanted to start a movie studio. Our venture backers and our executive team confused our technology and our tools — and our passion for the games business — with any practical experience in the real business we were in. We were an entertainment business – and not a very subtle entertainment business. As we were about to find out, if video game players wanted a cinematic experience, they went to the movies, they didn’t buy a video game. Our customers wanted to kill, shoot or hunt for something. Fancy video narratives and plots were not video games.
Interest Alignment
Why VC’s invested in companies like ours is what’s great and bad about entrepreneurship. A Venture Capitalist I respect reminded me that he thought about investment risk as either:
investing $1 million in 10 companies and have all ten succeed. With each of those ten companies returning 2x their money for $20 million. Or
investing in 10 companies and having 8 fail - but the remaining two companies returning 20x their money for $40 million.
His point was that it was in the VC’s interest in having entrepreneurs swing for the fences.
However the VC’s are managing a portfolio while you, the entrepreneur are managing one company – yours. While VC’s might love you and your firm, a 2x return isn’t why they’re in business. It’s nothing personal, but your interests and your VC’s may not be aligned. (More on this in future posts.)
The Search for the Black Swan
What keeps founders and their investors going is the the dream/belief that your startup will be the Black Swan – a company that breaks all the obvious rules, ignores tradition and does something unique and spectacular and with a result that is unpredicted and financial returns that are breathtaking.
Think of the Microprocessor, Personal Computer, Internet, Twitter, Youtube, Facebook, Google, the iPhone. Creating those technologies and companies required entrepreneurs willing to follow their own vision and convincing others that the path is worth following.
The mistake isn’t having a vision and taking risks. The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.
Customer Development There was nothing wrong about Rocket Science having a vision radically different than the conventional wisdom. We could have been right and invented a new form of gaming and entertainment. What went awry was continuing to execute on the vision when all the evidence in front of us told us our hypothesis was wrong. We compounded the problem when we failed to have an honest discussion about why it made sense to ignore the evidence. (A tip-off is when you start saying, “they just don’t get it yet.”)
At Rocket Science, hubris took over and was about to lead to the fall.
Customer Development says having a vision, faith and a set of hypotheses are a normal part of the startup experience. But it is critical to build in a process for testing those hypothesis outside the building and listening to the responses – or you might as well throw your money in the street.
Lessons learned?
While a lack of relevant domain expertise is not always fatal, believing you don’t need any is.
Founders need to validate their vision in front of customers early and often.
Your goals and your VC’s goals may not be aligned. Make sure they are.
At Rocket Science while my partner Peter was managing the tools and game development, I was managing everything else. Which at this stage of the company was marketing and financing.
Our “Hollywood meets Silicon Valley” story played great in Silicon Valley, they ate it up in Hollywood, and the business press tripped over themselves to talk to us. The story had universal appeal, and we spun the tale and keep the buzz going. It worked. Judging by the ink we had gotten, we were the hottest company in the game business, with stories in Fortune, Forbes, Variety, The Hollywood Reporter, and the cover of Wired magazine. Yet we hadn’t shipped a single product.
While it felt wonderful at the time, this was a very bad idea.
Everyone Else is an Idiot
The theme of our press blitz was all about how we were going to show the old tired game companies the right way to make video games. Our press infuriated the established companies who had spent years building games that sold well, but had zero press recognition. (They all accurately predicted our demise because of our lack of game expertise.) Ah, the arrogance of inexperience. Fortunately I’ve never been good at lying, to be effective in communicating a story I truly had to believe in what I was saying. At the time I was a true believer that Rocket Science was going to change the gaming world. The positive effect of the tidal wave of press was as a door opener for us to raise money from corporate partners. Companies in the entertainment business around the world knew who we were, and were interested in meeting us, if only to see what the hype was about. Our VP of Business Development had no problems getting meetings and fund raising was easy.
The Digital Dream Team
Way before the Internet phenomenon, we had created “Rocket Science the brand” that was much bigger in size and importance than Rocket Science the company. One magazine called us the “Digital Dream Team”, young, edgy and hip, and by the looks of the company (great building, nice furniture, and well dressed 20-year olds) we were trying to live up to the reputation. All this activity occurring before we actually shipped a product. We were larger than life, but as one potential investor told us, “You guys are all hat and no cattle.”
Believing Your Own BS is Toxic
Lots of noise and smoke before a product ships seems to be a toxic byproduct of enthusiastic entrepreneurs. Every generation of new technology seems to find a willing audience in naïve journalists and eager readers. However, when the smoke clears the surviving companies are more than likely the ones that focussed on execution, not on creating a cacophony of press releases. If Rocket Science wasn’t a clear enough lesson in the danger of premature enthusiasm, the dot-com bubble that followed should have been. The only difference between us and the Internet bubble that would follow was that we did branding on the cheap by creating our image with public relations, whilethe dot-bomb era was to do it by spending enormous sums on advertising (those large venture rounds had to get spent somewhere.)
Hindsight is wonderful. For years the one solace I was able to take from the Rocket Science debacle was that I had got the branding right. Then I watched the criminally expensive dot-bomb-bust branding activities to see how futile and wasteful it was to brand a company before it has shipped products.
To a Hammer Everything Looks Like a Nail In hindsight my failure was that I executed to my strength – telling a compelling story – without actually listening to customer feedback.
It wasn’t that I didn’t know how to listen to customers. It wasn’t that I didn’t have a smart VP of Marketing who was getting early feedback from customers and screaming that the games didn’t match the hype. It’s that as CEO I was too busy talking to the press and raising money to hear customer comments directly.
I had outsourced customer feedback and ignored the input. In fact, hearing input that contradicted the story I was telling created cognitive dissonance. So while the words may have passed through my ears I couldn’t “hear” it. Not being able to hear negative customer input is an extremely bad idea.
Out of the Ashes A few of the key tenets of Customer Development, came from the ashes. The Customer Discovery lessons of “get outside the building and test your hypothesis with customers,” and “the founders need to hear the results,” came from this debacle.
The Customer Validation lesson of, “no formal launch until you have early sales validating the product and sales process” was also born here. Given the lukewarm feedback we were getting from potential customers and channel buyers we should have dramatically dialed back the hype until the follow-on games could match it. Given the talented people we had, there’s no doubt they would have done so. Instead the huge mismatch between expectations and reality of our first games diminished the brand and demoralized the company – we never recovered.
Lessons Learned
PR is not a product- it is a demand creation activity to fill a sales channel
The product needs to come close to the hype
Fire the CEO who insists on press and PR before they understand customer feedback
Branding is a process that should happen after you have customers
What do you mean you don’t want to hear about features? I was now a CEO of Rocket Science, and having a great time building the company (more about that in future posts.) Unfortunately, while I had gone through phases of video game addiction in my life, in no way could I be described as even a “moderate hard-core gamer,” which ruled me out as a domain expert. So I got out out of the building to meet and understand our customers and distribution partners. I remember after a month or two of talking to 14-22 year old male gamers (our potential target market,) I realized that for the first time in my career I had no emotional connection to my customers or channel partners.
I was about 90 days into the company when I began to realize there was something very different about this business. In previous companies I could talk about technology details and how the product features could solve a customers problem. But people didn’t buy video games on features and they weren’t looking to solve a problem. I was in a very, very different business.
I was in the entertainment business.
There couldn’t have been a worse choice for CEO in Silicon Valley.
Alarm bell one should have started ringing – for me and my board.
Hollywood Meets Silicon Valley was an Oxymoron A key premise of our new company was that our video compression and authoring technology would revolutionize how games were made and played. We believed that by putting full motion video (i.e. movies) into video games we could tell stories, build characters, have narratives and bring all the 100 years of craft and cinematic experience of Hollywood to the sterile “shoot and die” twitch games that were currently in vogue. (This wasn’t just some random Silicon Valley fantasy. My partner had convinced several major Hollywood names that this was the inevitable consequence of the merger of Hollywood and Silicon Valley. And at the time it was a plausible scenario.)
But in reality our passionate belief that video would transform gaming was just our hypothesis. There was zero proof in the marketplace that was the case. And we weren’t going to be bothered to go out and prove ourselves wrong with facts. (Why should we – our VC’s had already told us what geniuses we were by fighting to even get into the deal to fund us. Never mind that no one on our board was in the game business or even played games.)
Alarm bell two should have started ringing – for me and my board.
Swing For the Fences
Since we were so smart we were going to ramp up and build not one game, but an entire game studio based on this hypothesis. Why shouldn’t we. Doing one game and seeing customer reaction meant a) acknowledging that some of our assumptions might be wrong, and 2) wasting time. We were all about scale and swinging for the fences. That’s what VC funded companies do, don’t they?
Alarm bell three should have started ringing – for my partner and me.
Tools Are the Not the Product We were going to build an easy to use authoring system that would revolutionize how games were made. (My partner had convinced several of the key members of the Apple Quicktime team to join us.) Our tools group became as important as our content group. Unfortunately, the market was going to remind us that games are about game play.
Customers don’t care about your tools regardless of what business you’re in. Customers of software applications don’t say, “wow, elegant code base.” In movies theater-goers don’t leave talking about your cameras, just whether they were entertained, and in restaurants diners don’t care about your cooking implements, what matters is what the food tasted like. The tools may provide efficiencies, but what customers care about is your final product. (Later on, way too late, we’d remind ourselves it’s the game stupid.)
Alarm bell four should have started ringing louder for me.
Lessons learned
Never, ever, start a company when you’re not passionate about the company, product and customers
Always validate your key assumptions on what makes your company tick
Swing for the fences is your VC’s strategy. Make sure it is yours.
Don’t confuse your passion for your tools with why your customers will buy your product.
Ravi Belani was nice enough to set it up, blog about the talk and film it. The relevant part starts about 4:30 into the video (wait for it to download.)
Lessons Learned
Most entrepreneurs start a company with hypothesis not facts
None of these hypothesis can be tested in the building
Sometimes faith-based decisions can be based on too much faith.
Entrepreneur-in-Residence After SuperMac I had been approached by one of our venture investors to be an entrepreneur in residence (EIR), a Silicon Valley phrase which says one thing but means another.
To an entrepreneur, being asked to join a venture firm with an Entrepreneur-in-Residence title means you have been tapped on the shoulder by the VC gods. It means you get to sit at a venture capital firm (some even pay you for the privilege) and stay until you have come up with an idea for your next company or have joined a company you’ve met as they passed through the VC’s offices. Depending on the size of the venture firm they may have one to three EIR’s who stay an average of a year or so. It really means that the VC’s would like to own a piece of you.
To a VC it’s a cheap investment, and if they somehow don’t bind you to their firm, someone else will. In reality an EIR is a set of wonderful golden handcuffs. Of course no VC firm will come right out and say, “If you’re an EIR for us you can’t do your next deal with any other firm.” Hmm… You’ve taken their money, eaten their food, sat in their meetings and you are going to take money from someone else? They have your soul. It sounded like a great deal. I had no idea what I wanted to do next, and would get paid to think about it? How could it go wrong? Little did I know.
Video Games At SuperMac, Peter Barrett was the witty and creative 24-year old Australian engineer who had designed several of our most successful products, culminating with the software for the Video Spigot. Now he wanted to go off start his own company. I offered to introduce him to the firm whose Entrepreneur-in-Residence offer I had just accepted. I asked Peter what kind of company he had in mind and was surprised and dismayed by the answer, “I want to make video games.” I remember thinking, “What a disappointment one of the smartest engineers I know and he is going to waste his time making games.” I didn’t give his video game idea another thought. I set up the meeting for him, and at the request of the VC who was going to see him, agreed to sit in when they met.
It was a Friday and we showed up at the VC offices on Sand Hill road. Peter had no slides, and I had absolutely no idea what he was about to say, all I knew is that he wanted to talk about something I was utterly uninterested in – video games.
Henry the Vth
To this day, the VC and I still believe either Peter made what was the single most compelling speech we have ever heard or he had slipped something funny into our water. As Peter began to speak extemporaneously our mouths slowly fell open as he described the video game market, its size, its demographics, the state of the technology, and the state of games. He took us through a day (and a night) of a hardcore gamer and told us about the new class of CD-ROM based game machines about to hit the market.
Peter described the first company in which “Hollywood meets Silicon Valley” and we were enthralled. When he elaborated how CD-ROMs were going to change both the nature of gaming and the economics of the content business, we were certain he had a brilliant idea and by the end of the meeting convinced that this was a company would make a ton of money.
By the end of the meeting the seasoned venture capitalist and I had signed up.
While this all might sound farcical now, a little historical context is in order. The CDROM content business in the early 1990’s was one of the many of the long line of venture capital fads. If you were a “with it” VC you needed to have a “Content” or “Multimedia” company in your portfolio to impress your limited partners – educational software companies, game companies, or anything that could be described as content and/or Multimedia.
There Ought to be a Law
Nowadays there are laws that allow you to back out of a time-share condo contract, or used car purchase after seven days because even the government believes there are times when grown adults lose their minds and stand up and yell “Yes I believe, sign me up!” There are still no laws like that in the venture capital business.
A month later, after raising $4 million dollars (we literally had VC’s fighting over who else would fund us), Peter and I started our video game company, Rocket Science Games.
In reality I had been hired as CEO and the adult supervision and administrative overseer of one of the most creative talents in the valley. And I would get to use my marketing skills at generating an industry-wide reality distortion field to make this company look like the second coming.
I was going to find out why this wasn’t a good idea.
Lessons learned
Your level of due diligence should be commensurate with your position in the company and proportional to the reality distortion field of the presenter
Never join (or start) a company whose business model you can’t draw
Subjects in which you are not a domain expert always sound exciting
Excuse the non-Customer Development, non-entrepreneurial post. I can’t get this one out of my head.
————
The VENONA Project One of the most interesting (declassified) stories of cryptography is the deciphering of Soviet communications to their diplomatic missions in the U.S during World War II. What was amazing about these decrypts was the Soviets used one-time pads which were theoretically unbreakable. The National Security Agency has a great website on the subject.
I had dinner last week with someone involved in the VENONA project (now retired.) We talked about one of the spies unearthed in the decoded messages; Ted Hall, a 19-year scientist at Los Alamos working on the Manhattan Project. For lots of complicated reasons Hall was never arrested nor charged with a crime. Hall’s interest in Communism came from literature his older brother Ed brought home from college.
When Ted Hall went to work on the Atomic Bomb during World War II his older brother Ed joined the Air Force.
My Brothers Keeper During the Cold War, when Ted Hall was under suspicion of being a Soviet spy, his brother Ed Hall, stayed in the Air Force and worked on every U.S. military missile program in the 1950′s (Atlas, Thor, etc.)
Ed Hall eventually became the father of the Minuteman missile project, our land-based ICBM carrying nuclear weapons to destroy the Soviet Union.
Surely the KGB, who ran Ted Hall as a spy, knew about his brother? Perhaps even first…?
A Wilderness of Mirrors My dinner companion, (who had a hand in his agencies counterintelligence group,) “acted” surprised about the connection between the two…
Entrepreneurs tend to view adversity as opportunity.
You’re Hired, You’re Fired. My first job in Silicon Valley: I was hired as a lab technician at ESL to support the training department. I packed up my life in Michigan and spent five days driving to California to start work. (Driving across the U.S. is an adventure everyone ought to do. It makes you appreciate that the Silicon Valley technology-centric culture-bubble has little to do with the majority of Americans.) With my offer letter in-hand I reported to ESL’s Human Resources (HR) department. I was met by a very apologetic manager who said, “We’ve been trying to get a hold of you for the last week. The manager of the training department who hired you wasn’t authorized to do so – and he’s been fired. I am sorry there really isn’t a job for you.”
I was stunned. I had quit my job, given up my apartment, packed everything I owned in the back of my car, knew no one else in Silicon Valley and had about $200 in cash. This could be a bad day. I caught my breath and thought about it for a minute and said, “How about I go talk to the new training manager. Could I work here if he wanted to hire me?” Taking sympathy on me, the HR person made a few calls, and said, “Sure, but he doesn’t have the budget for a lab tech. He’s looking for a training instructor.”
You’re Hired Again
Three hours later and a few more meetings I discovered the training department was in shambles. The former manager had been fired because:
the 10 week training course (6-hours a day) hadn’t been written
the class was supposed to start in 6 weeks.
As I talked to the head of training and his boss, I pointed out that the clock was ticking down for them, I knew the type of training military maintenance people need, and I had done some informal teaching in the Air Force. I made them a pretty good offer – hire me as a training instructor at the salary they were going to pay me as a lab technician. Out of desperation and a warm body right in front of them, they realized I was probably better than nothing. So I got hired for the second time at ESL, this time as a training instructor.
The good news is that I had just gotten my first promotion in Silicon Valley, and I hadn’t even started work.
The bad news is that I had 6 weeks to write a 10 week course on three 30-foot vans full of direction finding electronics plus a small airplane stuffed full of receivers. “And, oh by the way, can you write the manuals for the operators while you’re at it.” Since there was very little documentation my time was split between the design engineers who built the system and the test and deployment team getting the system ready to go overseas. As I poured over the system schematics, I figured out how to put together a course to teach system theory, operations and maintenance.
Are You Single? After I was done teaching each the day, I continued to write the operations manuals and work with the test engineers. (I was living the dream – working 80 hour weeks and all the technology I could drink with a fire hose.) Two weeks before the class was over the head of the deployment team asked, “Steve are you single?” Yes. “Do you like to travel?” Sure. “Why don’t you come to Korea with us when we ship the system overseas.” Uh, I think I work for the training department. “Oh, don’t worry about that, we’ll get you temporarily assigned to us and then you can come back as a Test Engineer/Training Instructor and work on a much more interesting system.” More interesting than this? Sign me up.
You’re Not So Smart, You Just Show Up a Lot While this was going on, my roommate (who I knew from Ann Arbor where he got his masters degree in computer science,) couldn’t figure out how I kept getting these increasingly more interesting jobs. His theory, he told me, was this: “You’re not so smart, you just show up a lot in a lot of places.” I wore it as a badge of honor.
But over the years I realized his comment was actually an astute observation about the mental mindset of an entrepreneur, and therein lies the purpose of this post.
Congratulations, You’re now in Charge of your Life Growing up at home, our parents tell us what’s important and how to prioritize. In college we have a set of classes and grades needed to graduate. (Or in my case the military set the structure of what constituted success and failure.) In most cases until you’re in your early 20′s, someone else has planned a defined path of what you’re going to do next.
When you move out on your own, you don’t get a memo that says “Congratulations, you’re now in charge of your life.” Suddenly you are in charge of making up what you do next. You have to face dealing with uncertainly.
Most normal people (normal as defined as being someone other than an entrepreneur) seek to minimize uncertainty and risk and take a job with a defined career path like lawyer, teacher or fire fighter. A career path is a continuation of the direction you’ve gotten at home and school – do these things and you’ll get these rewards. (Even with a career path you’ll discover that you need to champion your own trajectory down that path. No one will tell you that you are in a dead end job. No one will say that it’s time to move on. No one will tell you that you are better qualified for something elsewhere. No one will say work less and go home and spend time with your partner and/or family. And many end up near the end of their careers trapped, saying, “I wish I could have…, I think I should have…”)
Non-Linear Career Path But entrepreneurs instinctually realize that the best advocate for their careers is themselves and that there is no such thing as a linear career path. They recognize they are going to have to followtheir own internal compass and embrace the uncertainty as part of the journey.
In fact using uncertainty as your path is an advantage entrepreneurs share. Their journey will have themtry more disconnected paths than someone on a traditional career track.And one day all the seemingly random data and experience they’ve acquired will end up as an insight in building something greater than the sum of the parts.
When I was a young marketer I learned how to listen to customers by making a fool of myself.
Twenty eight years ago I was the bright, young, eager product marketing manager called out to the field to support sales by explaining the technical details of Convergent Technologies products to potential customers.
The OEM Business Convergent’s business was selling desktop computers (with our own operating system and office applications) to other computer manufacturers – most of them long gone: Burroughs, Prime, Monroe Data Systems, ADP, Mohawk, Gould, NCR, 4-Phase, AT&T. These companies would take our computers and put their name on them and resell them to their customers.
Business customers were starting to ask for “office automation solutions” – word processing, spreadsheets, graphing software on a desktop. This was just before the IBM PC hit the desktop so there were no “standard” operating systems or applications for desktop platforms. Computer hardware companies were faced with their customers asking for low-cost (relatively) desktop computers they had no experience in building. Their engineering teams didn’t have the expertise using off-the-shelf microprocessors (back then “real” computer companies designed their own instruction sets and operating systems.) They couldn’t keep up with the fast product development times that were enabled by using standard microprocessors. So their management teams were insisting that they OEM (buy from someone else) these products. Convergent Technologies was one of those OEM suppliers.
Their engineers hated us.
I was traveling with the regional sales manager who had called on these companies, gotten them interested and now needed someone from the factory to provide technical details and answer questions about how the product could be configured and customized.
See How Smart I Am As the eager young marketer on my first sales call, as soon as we shook hands I was in front of the room pitching our product and technical features. I knew everything about our operating system, hardware and applications – and I was going to prove it. I talked all about how great the new products were and went into excruciating detail on our hardware and operating system and explained why no one other than our company could build something so brilliantly designed. (This being presented to another company’s proud engineering team who was being forced to buy product from us because they couldn’t build their own in time.) After I sat down I was convinced the only logical conclusion was for the customer to tell us how many they wanted to buy.
The result wasn’t what I expected. The customers didn’t act particularly excited about the product and how brilliantly I presented it. I do believe some actually rolled their eyes. They looked at their watches, gave our sales guy a quizzical look and left.
After the meeting our sale rep took me aside and asked if “perhaps I wouldn’t mind watching him on the next call.“
Sports Scores The next day, as I drove to our next meeting the sales guy was intently reading the sports section of the newspaper and as I glanced over he seemed to be writing down the scores. I wondered if he had a bookie. When we got to the meeting he reminded me to be quiet and follow his lead.
We shook hands with the customers, but instead of launching into a product pitch (or better, letting me launch into the pitch) he started asking how their families were. He even remembered the names of their wives and kids and some details about schools or events. (I couldn’t believe it, here we were wasting precious time and the dumb sales guy is talking about other stuff.)
Just as I thought we were going to talk about the product, he then mentioned the previous nights football game. (Damn, another five minutes down the tube as the whole room chimed in with an opinion as we talked about something else unimportant.)
The Customer is a Genius Then instead of talking about our products he segued the conversation into their products. He complemented their elegantly designed minicomputers and made some astute comment about their architecture (now I’m rolling my eyes, their computers were dinosaurs) and asked who were the brilliant designers. I was surprised to see that they were in the room. And soon the conversation were about architectural tradeoffs and then how customers didn’t appreciate the elegant designs and how the world was going to hell in a handbasket because of these commodity microprocessors. And our sales guy was agreeing and commiserating. (And I’m thinking why is he doing all this, just tell these idiots that the world has passed them by and they need to buy our stuff and lets get an order.)
The engineers spoke about all the pressure they were getting from management to build desktop personal computers rather than their traditional minicomputers. And that their management wanted these new systems on a schedule that was impossible to meet. Then our sales guy says something that makes me stop breathing for a while. “I bet if your management team would give you guys the resources you guys could build desktop computers better than anyone, even better than us.” There’s a unanimous agreement around the table about how great they were and how bad management was.
The Consultative Sale Our sales guy then quietly asked if there was any way we could help them. (Help them?!! We’re here to sell them our stuff, why can’t we just present what we got and they’ll buy it.) The VP of Engineering says, “well we don’t have the resources or time, and as long as you know we could build better computers then you guys, why don’t you tell us the details about your computers.”
Engineers as Salesmen I thought (and still do) that this sales guy walked on water. He had spent 12 years at DEC, first as a hardware engineer designing part of the PDP-16, then as the marketing manager for the LSI-11 and then into sales.
Making sales calls with him taught me what a world class salesperson was like. It also made me understand what kind of support sales people needed from marketing and what marketing programs were wasted motion.
It also made me realize that there are times you don’t want any sales people in your company.
Startups and Sales If you read this post you can come away with the impression that every startup with a direct salesforce needs a consultative sales team. Not true.
The answer depends on your answer to two questions:
which step in the Customer Development process are you on?
what Market Type is your startup?
Customer Development and Selling Strategy If you’ve just started your company you are in customer discovery. If you’ve tried to slog your way through my book on Customer Development you know that I’m insistent that the founders need to be the ones getting outside the building (physically or virtually) to validate all the initial hypotheses of the business model and product. If you hire a VP of Sales with the idea that they can do customer discovery you violated the first principle of Customer Development – this isn’t a step the can be outsourced to a non-founder.
Hiring a VP of Sales in customer discovery typically sets a startup back. It’s only after you’re done with customer discovery and are in the final steps of customer validation (building a repeatable and scalable sales process) that you start hiring a sales executive.
The next thing you need to do is match your sales team with your market type.
Market Type and Sales Teams If you remember from a previous post, startups fall into four Types of Markets. You need to hire the right type of sales people for the type of market.
If you are in a New Market, (delivering what Clayton Christensen calls disruptive innovation) the market doesn’t even have a name and customers have no clue on how your product works or how it could help them. This market cries out for a sales force that can help educate and guide the market to making the right choices. Your sales team is an extension of your marketing department. The same is true if you are in an existing marketing and trying to sell to a niche or a segment of the market based on your knowledge of their particular needs. Both New Markets and Resegmented Niche Markets required a skilled consultative sales force.
This is very different from the sales team you would hire to sell in an existing market or a cheaper product.
If you’re in an existing market and you have a superior product, by all means tout your features and specifications. However, your product itself will be doing a lot of the selling. If it is demonstrably better as you claim your marketing department needs to communicate that competitive advantage and your sales curve should look linear as you take share from the existing incumbents.
If you are resegmenting an existing market a product with a cheaper alternative, by all means tout your price. Your marketing department should be all over this. In both cases you really don’t need a skilled/consultative sales force. A sales team with a great rolodex will do.
I was at the Stanford library going through the papers of Fred Terman and came across a memo from 1956 that probably hasn’t been seen or read in over 50 years. It had nothing to do with the subject I was looking for, so I read it, chuckled, put it back in the file and kept leafing through the other papers. About a minute later I did a double-take as it hit me what I had just read. (I’ll show you the memo in a second. But first some background.)
Things Change In 1956 Hewlett Packard (HP) was a 17-year old company with $20 million in test equipment sales with 900 employees. It was still a year away from its IPO.
Its latest product was an oscilloscope, the HP 150a.
HP 150a Oscilloscope 1956
In March of 1956, Fred Terman, the Stanford professor who encouraged Bill Hewlett and David Packard to start HP, wrote Bill Hewlett asking for help.
Terman, who now was the Provost of Stanford, had joined the U.S. Army Signal Corps advisory board, and the Army was going to acquire their first computer for research. No one in the Army Signal Corps knew much about computers. (To be fair in 1956 not too many people in the world knew much either.) So the Army asked Terman for help.
Fred Terman wrote to Bill Hewlett asking if he or anyone at Hewlett Packard could help them figure out these “computers.”
Hewlett’s answer, in the memo I discovered in the Stanford library, is below.
I have no personal knowledge of computers nor does anyone in our organization have any appreciable knowledge.
We Changed Our Mind
In 1966, 10 years after Hewlett’s memo, Hewlett Packard’s revenue and headcount had grown ten fold; $200 million and 11,000 employees – all from test and measurement equipment. That year HP introduced its first computer, the HP 2116A, as an instrument controller for HP’s test and measurement products. (Hewlett’s partner Dave Packard wanted to get into the computer business.) It was priced at $22,000 – equivalent to about $140,000 in 2009 dollars.
HP2116B Computer
Thirty-three years after introducing its first computer, Hewlett Packard split into two separate companies. The original Hewlett Packard which made test and measurement products was spun-out and renamed Agilent. The remaining company kept the Hewlett Packard name and focussed on computers.
Agilent is a $5.8 billion dollar test and measurement company.
Hewlett Packard (HP) at a $118 billion is the largest PC and notebook manufacturer in the world.
That’s a pretty long way from a company that admitted it knew nothing about computers.
Elephants Can Dance HP’s complete makeover made me wonder about other large companies that reinvented themselves.
Intel was founded in 1968 to make memory chips (bipolar RAM) but 17 years later they got out of the memory business and become the leading microprocessor company.
IBM had a near death experience in 1993, and moved from a product-centric hardware company to selling a complete set of solutions and services.
Apple was a personal computer company but 25 years after it started, it began the transformation to the iPod and iPhone.
A few carriage makers in the early part of the 20th century made the transition to become car companies. A great example is William Durant’s Durant-Dort Carriage Company. Durant took over Buick, in 1904 and in 1908 he created General Motors by acquiring Oldsmobile, Pontiac, and Cadillac.
Elephant Graveyard
Reinvention of large companies, while making for great case studies are rare. For the first 25 years HP’s business model was static. It got bigger by inventing new test and measurement equipment and it hired people who knew how to execute that strategy. Of course HP did ship new products and innovate, but their center of innovation was sustaining innovation, around the core of their existing business. (Clayton Christensen describes this brilliantly in the Innovators Dilemma.)
However, no markets last forever. Technology changes, culture changes, customer needs change, more agile competitors emerge, etc. So what causes some big companies to reinvent themselves and others to remain static?
Creative Destruction Most established companies fall into the seductive trap of following short term profits all the way into the ground – leaving only their t-shirts and coffee cups. It’s not the executives are stupid it’s just that there are no incentives (or corporate DNA) for doing otherwise. General managers of divisons are compensated on division P&L not long term innovation. CEO’s and the executive staff are watching the corporate bottom line and earnings per share. Wall Street wants quarterly earnings.
It’s a pretty safe bet that left to their own devices most large corporations wouldn’t last more than a generation without major reinvention. And venture capital and entrepreneurship has made life even tougher for the modern corporation. Over the last 35 years venture capital has funded nimble new entrants (on a scale never imagined by Schumpeter) who exist to exploit discontinuities in technology or customer behavior. Startups have forced an accelerated cycle of creative destruction for large companies that didn’t exist in the first half of the 20th century.
Cultural Revolution at Large Corporations – the Founders Return
Of the companies that do reinvent themselves it’s interesting that often its the founder or an outsider that has the insight and makes the radical changes. At HP the founders were still at the company and still running the business. It was David Packard who wanted to get into the commercial computer business – over the objections of his co-founder Bill Hewlett and most of the company. Packard had the stature and authority to encourage the shift and the internal political acumen to acquire a minicomputer company and label the first HP computer as a “instrument controller.”
At Apple the company reinvented itself on Steve Jobs return. Howard Shultz came back at Starbucks, Michael Dell reengaging at Dell. Outsiders like Lou Gerstner at IBM and Jon Rubenstein at Palm were brought in to reinvent their companies.
Lessons Learned
It’s the founders that can reinvent a company by seeing market shifts that professional managers focused on execution can not
If the founders aren’t around, bring in outsiders with fresh insights
Raising our kids and being an entrepreneur wasn’t easy. Being in a startup and having a successful relationship and family was very hard work. But entrepreneurs can be great spouses and parents.
This post is not advice, nor is it recommendation of what you should do, it’s simply what my wife and I did to raise our kids in the middle of starting multiple companies. Our circumstances were unique and your mileage will vary. Read the previous post first for context.
Biological Clocks After Convergent and now single again, I was a co-founder of my next two startups; MIPS and Ardent. I threw myself into work and worked even more hours a day. And while I had great adventures (stories to come in future posts,) by the time I was in my mid-30’s I knew I wanted a family. (My friends noticed that I was picking up other people’s babies a lot.) I didn’t know if I was ready, but I finally could see myself as a father.
I met my wife on a blind-date and we discovered that not only did we share the same interests but we were both ready for kids. My wife knew a bit about startups. Out of Stanford Business School she went to work for Apple as an evangelist and then joined Ansa Software, the developer of Paradox, a Mac-database.
Product Launch Our first daughter was born about four months after I started at SuperMac. We ended up sleeping in the hospital lounge for 5 days as she ended up in intensive care. Our second daughter followed 14½ months later.
Family Rules My wife and I agreed to a few rules upfront and made up the rest as went along. We agreed I was still going to do startups, and probably more than most spouses she knew what that meant. To her credit she also understood that meant that child raising wasn’t going to be a 50/50 split; I simply wasn’t going to be home at 5 pm every night.
In hindsight this list looks pretty organized but in reality we made it up as we went along, accompanied with all the husband and wife struggles of being married and trying to raise a family in Silicon Valley. Here are the some of the rules that evolved that seemed to work for our family.
We would have a family dinner at home most nights of the week. Regardless of what I was doing I had to be home by 7pm. (My kids still remember mom secretly feeding them when they were hungry at 5pm, but eating again with dad at 7pm.) But we would use dinner time to talk about what they did at school, have family meetings etc.
Put the kids to bed.Since I was already home for dinner it was fun to help give them their baths, read them stories and put them to bed. I never understood how important the continuity of time between dinner through bedtime was until my kids mentioned it as teenagers.
Act and be engaged.My kids and wife had better antenna than I thought. If I was home but my head was elsewhere and not mentally engaged they would call me on it. So I figured out how to spit the flow of the day in half. I would work 10 hours a day in the office, come home and then…
Back to work after the kids were in bed. What my kids never saw is that as soon as they were in bed I was back on the computer and back at work for another 4 or 5 hours until the wee hours of the morning.
Weekends were with and for my kids. There was always some adventure on the weekends. I think we must have went to the zoo, beach, museum, picnic, amusement park, etc. a 100 times.
Half a day work on Saturday. While weekends were for my kids I did go to work on Saturday morning. But my kids would come with me. This had two unexpected consequences; my kids still remember that work was very cool. They liked going in with me and they said it helped them understand what dad did at “work.” Second, it set a cultural norm at my startups, first at Supermac as the VP of Marketing, then at Rocket Science as the CEO and at E.piphany as President. (Most Silicon Valley startups have great policies for having your dog at work but not your kids.)
Long vacations.We would take at least a 3-week vacation every summer. Since my wife and I liked to hike we’d explore national parks around the U.S. (Alaska, Wyoming, Colorado, Washington, Oregon, Maine.) When the kids got older our adventures took us to Mexico, Ecuador, India, Africa and Europe. The trips gave them a sense that the rest of the country and the world was not Silicon Valley and that their lives were not the norm.
Never miss an event.As my kids got older there were class plays, soccer games, piano and dance performances, birthdays, etc. I never missed one if I was in town, sometimes even if it was in the middle of the day. (And I made sure I was in town for the major events.)
Engage your spouse. I asked my wife to read and critique every major presentation and document I wrote. Everything she touched was much better for it. What my investors never knew is that they were getting two of us for the price of one. (And one of us actually went to business school.) It helped her understand what I was working on and what I was trying to accomplish.
Have a Date-Night. We tried hard to set aside one evening a week when just the two of us went out to dinner and/or a movie.
Get your spouse help.Early on in our marriage we didn’t have much money but we invested in childcare to help my wife. While it didn’t make up for my absences it offloaded a lot.
Traditions matter.Holidays, both religious and secular, weekly and yearly, were important to us. The kids looked forward to them and we made them special.
Travel only if it needed me. As an executive it was easy to think I had to get on a plane for every deal. But after I had kids I definitely thought long and hard before I would jump on a plane. When I ran Rocket Science our corporate partners were in Japan (Sega), Germany (Bertelsmann) and Italy (Mondadori) and some travel was unavoidable. But I probably traveled 20% of what I did when I was single.
Document every step. Like most dads I took thousands of photos. But I also filmed the girls once a week on the same couch, sitting in the same spot, for a few minutes – for 16 years. When my oldest graduated high school I gave her a timelapse movie of her life.
“Live to Work” or “Work to Live”? When I was in my 20’s the two concepts that mattered were, “me” and “right now.” As I got older I began to understand the concept of “others” and “the future.” I began to realize that working 24/7 wasn’t my only goal in life.
As a single entrepreneur I had a philosophy of, “I live to work” – nothing was more exciting or important than my job. Now with kids it had become, “I work to live.” I still loved what I did as an entrepreneur but I wasn’t working only for the sheer joy of it, I was also working to provide for my family and a longer term goal of retirement and then doing something different. (The irony is when I was working insane hours it was to make someone else wealthy. When I moderated my behavior it was when they were my startups.)
Work Smarter Not Harder As I got older I began to realize that how effective you are is not necessarily correlated with how many hours you work. My ideas about Customer Development started evolving around these concepts. Eric Ries’s astute observations about engineering and Lean Startups make the same point. I began to think how to be effective and strategic rather than just present and tactical.
Advice From Others As my kids were growing up I got a piece of advice that stuck with me all these years.
The first was when our oldest daughter was 6 months old, and a friend was holding her. She looked at the baby then looked at me and asked, “Steve do you know what your most important job with this baby is?” I guessed, “Take care of her?” No. “Love her?” No. “OK, I give up, what is my most important job.” She answered, “Steve, your job is teaching her how to leave.” This was one of the most unexpected things I ever heard. This baby could barely sit up and I have to teach her how to leave?
My friend explained, “your kids are only passing through. It will seem like forever but it will be gone in a blink of an eye. Love them and care for them but remember they will be leaving. What will they remember that you taught them?”
For the next 18 years that thought was never far from my mind.
What Will Your Epitaph Say? At some point I had heard two aphorisms which sounded very trite when I was single but took on a lot more meaning with a family.
This life isn’t practice for the next one. I started to realize that some of the older guys who I had admired as role models at work had feet of clay at home. They had chose their company over family and had kids who felt abandoned by their dads for work – and some of these kids have turned out less than optimally. I met lots of other dads going through the “could-have, would-have, should-have” regrets and reflections of the tradeoffs they had made between fatherhood and company building. Their regrets were lessons for me.
What will your epitaph say? When our kids were babies I was still struggling to try to put the work/life balance in perspective. Someone gave me a thought that I tried to live my live my life around. He asked me, when you’re gone would you rather have your gravestone say, “He never missed a meeting.” Or one that said, “He was a great father.” Holding my two kids on my lap, it was a pretty easy decision.
I hope I did it right.
Know When to Hold Them, Know When to Fold Them,Know When to Walk Away When my last startup, E.piphany went public in the dot.com boom, I was faced with a choice; start company number nine, or retire.
I looked at my kids and never went back.
Thanks to my wife for being a great partner. It takes two.
Watching my oldest daughter graduate high school this week made me think about what it was like raising a family and being an entrepreneur.
Convergent Technologies When I was in my 20’s I worked at Convergent Technologies, a company that was proud to be known as the “Marine Corps of Silicon Valley.” It was a brawling “take no prisoners,” work hard, party hard, type of company. The founders coming out of the DEC (Digital Equipment Corporation) and Intel culture of the 1960’s and ‘70’s. As an early employee I worked all hours of the day, never hesitated to jump on a “red-eye” plane to see a customer at the drop of a hat, and did what was necessary to make the company a winner. I learned a lot at Convergent, going from product marketing manager in a small startup to VP of Marketing of the Unix Division as it became a public company. Two of my role models for my career were in this company. (And one would become my mentor and partner in later companies.) But this story is not about Convergent. It’s about entrepreneurship and family.
Like most 20-somethings I modeled my behavior on the CEO in the company. His marketing and sales instincts and skills seemed magical and he built the company into a $400 million OEM supplier, ultimately selling the company to Unisys. But his work ethic was legendary. Convergent was a 6-day a week 12-hour day company. Not only didn’t I mind, but I couldn’t wait to go to work in the morning and would stay until I dropped at night. If I did go to social events, all I would talk about was my new company. My company became the most important thing in my life.
But the problem was that I was married.
Uh oh.
What’s More Important – Me or Your Job? If you’re are a startup founder or an early employee, there may come a time in your relationship that your significant other/spouse will ask you the “what’s more important?” question. It will come after you come home at 2 am in the morning after missing a dinner/movie date you promised to make. Or you’ll hear it after announcing one morning that weekend trip isn’t going to happen because you have a deadline at work. Or if you have kids, it will get asked when you’ve missed another one of their plays, soccer games or school events because you were too busy finishing that project or on yet another business trip. At some point your significant other/spouse’s question will be, “What’s more important, me and your family or your job?”
I remember getting the question after missing yet another event my wife had counted on me attending. When she asked it, I had to stand there and actually think about it. And when I answered, it was “my job.” We both then realized our marriage was over. Luckily we had no kids, minimal assets and actually held hands when we used the same lawyer for the divorce, but it was sad. If I had been older, wiser, or more honest with myself, I would have understood that my wife and family should have been the most important thing in my life.
Lies Entrepreneurs Tell Themselves Part of my problem was that my reality distortion field encompassed my relationships. In hindsight I had convinced myself that throwing myself into work was the right thing to do because I succumbed to the four big lies entrepreneurs tell themselves about work and family:
I’m only doing it for my family
My spouse “understands”
All I need is one startup to “hit” and then I can slow down or retire
I’ll make it up by spending “quality time” with my wife/kids
None of these were true. I had thrown myself into a startup because work was an exciting technical challenge with a fixed set of end points and rewards. In contrast, relationships were messy, non deterministic (i.e. emotional rather than technical) and a lot harder to manage than a startup.
The Reality If it was up to my wife she wouldn’t have had me working the hours I was working and would rather have me home. She didn’t sign up for my startup, she had signed up for me.
While she stuck it out for seven years, she had no connection to the passion and excitement that was driving me; all she saw was a tired and stressed entrepreneur when I got home.
At this point in my career I had hit a couple of successful startups as a low level exec, making enough to remodel our kitchen, but not the big “hit” that made us so much money I could slow down or retire. And even if it did, startups are like a gambling addiction – if I had been honest, I would have had to admit I would probably be doing many of them.
“Quality time” with the wife or kids is a phrase made up by guilty spouses. My relationship wasn’t going to be saved by one great three-day weekend after 51 weekends at work. A great vacation with my wife wasn’t going to make up for being AWOL from home the rest of the year.
Summary For the next few years I licked my wounds and threw myself into two more startups. Over time I began to recognize and regret the tradeoffs I had made between work and relationships. I realized that if I ever wanted to get married again and raise a family that my life/work balance needed to radically change.
The next post describes what I have learned and observed in the following years about balancing my entrepreneurial drive with building a healthy relationship with my wife and kids.
When my students ask me about whether they should be a founder or cofounder of a startup I ask them to take a walk around the block and ask themselves:
Are you comfortable with:
Chaos – startups are disorganized
Uncertainty – startups never go per plan
Are you:
Resilient – at times you will fail – badly. How quickly will you recover?
Agile – you may find the real opportunities for your company was somewhere else. Can you recognize and capitalize on them?
Creative / Pattern Recognition – can you think “out of the box?” Or if not, can you recognize patterns others miss?
Passionate – is the company/product/customers the most important thing in your life? 24/7?
Tenacious – can you keep going when everyone else gives up? Can you keep giving 200% despite all the naysayers who don’t believe in your idea?
Articulate – can you create a reality distortion field and have others see and share your vision and passion?
And I remind them that they should be bringing some type of domain expertise (technical or business) to the table.
This is the minimum feature set for founders.
Other Roles in a Startup Generic advice given to entrepreneurs assumes that everyone is going to be the founder/co-founder. Yet for every founder there are 10-20 other employees who take the near-equivalent risks in joining an early-stage company. If you’re not a founder (by choice, timing or temperament,) you may be an early employee or a later stage startup employee.
(And my advice to students who believe they want to do a startup but are unsure if they want to start one, is to join one that’s already raised their first round of funding. Founders know they want to start something. If you’re unsure, you’ve just decided.)
I believe that founder, early and later stage employees require different risk/personality profile.
The Early Employee If you’re a founder/co-founder all the attributes I mentioned above are needed in spades. However, if you want to joina startup as an early employee (say in the first 25 employees,) you can modify the list above.
You still need to be comfortable with chaos and uncertainty, but by this time the major risk of where the first round of funding is coming from is gone. However, you will be dealing with almost daily change, (new customer feedback/insights from a Customer Development process and technical roadblocks,) as the company searches for a repeatable and scalable business model. This means you still need to have a resilient personality, and be agile.
Early stage employees are “self-starters” and show initiative rather than waiting for other people to tell them what to do or how to do it. (You may be wearing multiple hats in one-day.) You have to be passionate about your work, the company and its mission to be working 24/7. But more than likely you don’t need to be as articulate or creative as the founders (they’re doing the talking, while you’re doing the work.) And while you do need to be tenacious, you won’t need to be the last man standing if the ship goes down.
The Later Employee If you want to joina startup as a later employee (say employee number 25-125, before the company is profitable) you can continue to modify the list above.
You still need to be comfortable with chaos and uncertainty. And you will be dealing with change, but it won’t be the constant daily change the early employees dealt with. By now the company may have found and settled on a repeatable business model. And at this stage of the company rather than everyone doing everything, actual departments may begin to form. However, job responsibilities and organizations will change regularly and you need to feel comfortable in embracing those changes and taking responsibility and ownership.
And you’ll still need to have a resilient and agile personality, as new customer and product opportunities will appear and change your work. But it won’t be happening daily. And while you still need to love what you do your passion doesn’t have to extend to tattooing the company’s logo on your arm.
The Adventure of a Lifetime
Take the time and think through who you are and what level of challenge you are looking for.
You’re not joining a big company. Startups are the adventure of a lifetime. But make sure it fits who you are.
Customer Development by Vertical - Click to Enlarge
(As a reminder, the Customer Development process says your business plan is just a series of untested hypothesis (unless you’re a domain expert.) In contrast to simply executing your business plan, the Customer Development process is built on low-cost and continuous learning and iterating. You take your product vision and get out of your building to turn your hypothesis into facts. Ultimately you want to see if you can find customers and a market for the product as specified – as early as possible.
Execution by Vertical Market As the class progressed, students asked how the activities/functions of a startup; (Sales, Marketing, Business Development, Product Development, etc.) would look in each of the verticals. For example, How does sales differ from one market to another? Is marketing different if you’re in the cleantech business versus medical devices? How does product development differ in communications hardware versus enterprise software, etc.
Startup activities/functions
So we started by listing the basic startup activities/functions we thought that might differ by vertical market. Some of these are questions that would be addressed in a business plan. Others you need to know when you execute the plan.
Here is the list of basic startupactivities/functions our class discussion generated:
Opportunity – How big? Where do the ideas come from?
Innovation –Business Model? Technology?
Customers – Who are the Users? Who are the economic buyers?
Market Type – Existing/Sustaining? Niche? Low Cost? New/Disruptive?
Competition – Who is the competitor? Who is the Complementor?
Sales – What Channel to reach the customer?
Marketing – How do you create end user demand? Brand?
Business Development – What type of partnership or whole product is needed?
Customer Development Steps – How do we iterate with customers?
Business and Revenue Model – How do we organize to make money?
Intellectual Property/Patents – Strategic or Tactical, timing?
Regulatory Issues – What are they?
Time to Market – How long?
Product Development – How do you engineer it? Waterfall, Agile, Lean?
Manufacturing – How do you build it? Where?
Seed and Follow-on Financing – How do your finance it? How much? When?
Liquidity – How? M&A, IPO?
(These are just my checklist list items for students, your list doesn’t have to look like this.)
Building a Chart
We realized that if we wrote the names of the vertical markets across the top of the board, and then the startup functions on the left of the board, we could make a chart that could visually compare what differs across the vertical markets. Then it would be to discuss the optimum strategy for each of these market segments.
Each week, as the students learned something new about their particular project (what sales channel they should use, who the customer were, what type of manufacturing was appropriate, etc.) we added what they learned to each cell under their market. (This chart is not complete, just representative of what I’m using to teach and will be filling in over time.)
But even with a partially filled-in chart, you can see what used to be disconnected information is now sorted by vertical market. At a glance, you can see how startup capital needs differ by markets, how distribution channels and demand creation activities differ by market, and even how VC’s assess risk and reward by market.
It seem evident that success in a startup requires:
domain specific knowledge and/or hard won experience
and a methodology to acquire that knowledge or experience.
As an exercise, try filling in the chart for your market.
One of the key tenets of entrepreneurship is that you start your company with insufficient resources and knowledge.
Faith-basedEntrepreneurship At first, entrepreneurship is a Faith-based initiative. There is no certainty about a startup on day-one. You make several first order approximations about your business model, distribution channels, demand creation, and customer acceptance. You leave the comfort of your existing job, convince a few partners to join you and you jump off the bridge together.
At each startup I couldn’t wait to do this. No building, no money, no customers, no market? Great, sign me up. We’ll build something from scratch.
You start a company on a vision; on a series of Faith-based hypotheses.
Fact-basedExecution However, successfully executing a startup requires the company to become Fact-based as soon as it can.
Think about all the assumptions you’ve made to get your business off the ground. Who are the customers? What problems do they have? What are their most important problems? How much would they pay to solve them? What’s the best way to tell them about our product?…
Ad infinitum. These customer and market risks need to be translated into facts as soon as possible.
You can blindly continue to execute on faith that your hypothesis are correct. You’ll ship your product and you’ll find out if you were wrong when you run out of money
Or you can quickly get out of the building and test whether your hypothesis were correct and turn them into facts.
In hindsight, when I was young, this where I went wrong. It’s a lot more comfortable to hang on to your own beliefs than to get (or face) the facts. Because at times facts may create cognitive dissonance with the beliefs that got you started and funded.
Customer Development This strategy of starting on faith, and quickly turning them into facts is the core of the Customer Development process.
Reducing Risk – Simulation versus Customer Development If you remember the first part of this discussion, startups face two types of risk; invention risk and/or customer/market risk. In either type of startup you want to put in place processes in place to reduce risk.
Simulation to Reduce Invention Risk
If you’re in a vertical where “invention risk” is dominant, then you want to do everything you can to manage and reduce those risks. Simulation allows you to build test, fail, and iterate without actually building the physical device. (You can use static methods like Monte Carlo simulation, or dynamic methods using continuous or discrete simulation.) But however you do it, in companies with invention risk you want to simulate as much of process as possible, as early as possible. For some markets you can design a model of your product on a computer and conduct experiments with the computer model to understand whether it will work, long before you actually build it. For example, in the semiconductor business engineers spend enormous time, money and effort on simulation, the process of actually building the chip in software and running tests to see how well it will perform – well before they ever get to first silicon. And the holy grail of the biotech business is another simulation process called computer aided drug discovery, which someday might be used to streamline the drug discovery and development process.
Customer Development to Reduce Risk
Conversely, if you’re in a startup where the greatest set of risks are about failing to find the right customers/markets you would look for processes to reduce those risks. The Customer Development Process I teach and write about is designed to do just that.
The Customer Development Model
The Customer Development model says that when you start your company customer needs are unknown. You may have a set of hypothesis about them but you really don’t know. The Customer Development process puts you in continuous contact with customers to test your concept, fail, and iterate way before you actually ship the product. It allows you to systematically replace each business-critical hypothesis with facts.
(When I wrote the Four Steps to the Epiphany, the Customer Development text, I hadn’t yet thought about what vertical markets it might be appropriate for.)
Since my class was using the Customer Development text, I updated this diagram on to reflect in which markets the process was appropriate. For example, I told my students doing life sciences projects it would be 5-10 years before they needed to worry about customers. However, for the Web 2.0 companies they needed to start the Customer Development process now.
Customer Development by Vertical - Click to Enlarge
(As a reminder, if you’ve slogged you way through the Customer Development textbook, you know the Customer Development process says your business plan is just a series of untested hypothesis (unless you’re a domain expert.) So starting with the vision of your product, get out of the building, and see if you can find customers and a market for the product as specified. In contract to the linear execution via business plan, the Customer Development process is built on low-cost and continuous learning and iterating.)
Two Sides of the Same Coin
Simulation and Customer Development are simply two sides of the same coin. They both have offer startups a path of getting it wrong often and early without go out of business.
The next Vertical Markets post will put all the pieces together.
In 1994 Rocket Science Games was the only video game company with a rock in its lobby.
We had moved our game development facilities from Berkeley and Palo Alto and consolidated into one building on Townsend Street in the “South of Market” neighborhood in San Francisco. (We’re were just around the corner from the future home of SF Giants AT&T Baseball Park, which then was just a rubble-strewn parking lot in a sketchy neighborhood.)
Since we were the hip, new, edgy, “Hollywood meets Silicon Valley” video game company (more about “big hat, no cattle” startups in subsequent posts,) our office obviously had to match the image.
Our receptionists’ desk was built on the wing of a WWII P-51 fighter plane, and the rest of the office décor matched. All that is, except for our lobby, as our offices were on the 4th floor. When you got off the elevator, you faced a non descript corporate-looking set of walls.
One day, out for a walk at lunch, enjoying one of my favorite activities – watching them tear down the Embarcadero freeway (San Francisco urban upgrade post 1989 earthquake,) – I realized I was looking at the answer.
And it was much, much better than a space suit.
A week later as our employees came up the elevator there was a Lucite case on a pedestal with a single grey rock, lit with a single spotlight, on a velvet pillow. In front of it was a brass plaque that read:
“Moon rock, Apollo 18, July 1973 – Copernicus Crater.”
For the next few years, people from all around South of Market would come by the Rocket Science Games lobby to see our moon rock. It added to the mystique of the company – which helped with raising money and getting press ink. Everyone agreed that having our own moon rock was way cool.
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Postscript: In all that time, not a single person who admired the moon rock questioned its provenanceor authenticity. A bit surprising considering the intersection between geekdom and space. Maybe it was just too much ancient history.
Customer/Market Risk Versus Invention Risk One day I was having lunch with a VC sharing what I learned from my students. “Steve,” he said, “you’re missing the most interesting part of vertical markets. Our firm has a portfolio of companies across a broad range of markets and the way we look at it is pretty simple – the deals fall into two types: those with customer/market risk and those with invention risk.”
Markets with Invention Risk are those where it’s questionable whether the technology can ever be made to work – but if it does customers will beat a path to the company’s door.
Markets with Customer/Market Risk are those where the unknown is whether customers will adopt the product.
Based on this insight, I updated my earlier diagram to look like this. (The line is just a first approximation, nothing hard and fast about it.)
Market Risk vs. Invention Risk - Click to Enlarge
For companies building web-based products, product development may be difficult, but with enough time and iteration engineering will eventually converge on a solution and ship a functional product - it’s engineering, not invention. The real risk in markets like Web 2.0 is whether there is a customer and market for the product as spec’d. In these markets it’s all about customer/market risk.
There’s a whole other set of markets where the risk is truly invention. These are markets where it may take 5 or even 10 years to get a product out of the lab and into production. (Whether it will eventually work no one knows, but the payoff could be so large, investors will take the risk.) If the product does work, and say we’ve developed a drug that cures a type of cancer, your only problem is how big is the licensing deal going to be – not about whether there will be customers. In these markets it’s all about invention risk.
A third type of market has both invention and market risk. For example, complex new semiconductor architectures, (i.e. a new type of graphics architecture, or a new communications chip architecture) mean you may not know if the chip performs as well as you thought until you get first silicon. But then, because there might be entrenched competitors and your concept is radically new, you still need to invest in the customer development process to learn how to get design wins from companies who may be happy with their existing vendors.
The implications for entrepreneurs is that each of these (market risk versus invention risk,) require radically different financing models, a different type of venture investor, different timing for hiring sales and marketing, etc.
I now advise entrepreneurs to add these questions to their checklist when they start a company:
Am I in a “customer/market risk” company?
Am I in a company with “invention risk?
Or does my company have both types of risk?
How would that change my company strategy?
We’ll talk about how to reduce risk in each type of market in the next post.
In the past entrepreneurship was viewed (and taught) as a single process, with a single approach to creating a business plan and securing funding for a startup. The best entrepreneurship textbooks and blogs assume that advice to startups is generalizable. But as I learned from my students this “one-size-fits-all” approach does not work for all startups. Different market opportunities present radically different startup risks and costs.
Capital Requirements In my class students form teams and spend a semester building a detailed plan for a company. When I started teaching I launched project teams with this advice: All you need is a half a million dollars to start a company and at most a few million more to scale the company.” And the students nodded, OK, yes sir, and they wrote down, “a half a million bucks to start.”
The next week in class a project group raised their hands and said, “Hey, Professor Blank, we found out the common wisdom in the biotech business is that “we need $10-20 million just for the R&D phase and 100’s of million to get through clinical trials.”
“Of course,” I said, “Life science is completely different. The time to product and scale of investment is radically different than other startup markets.”
Intellectual Property At the next class I said, “You all ought to get out and start talking to customers on day one, and get early feedback on your idea. You don’t need to worry about any Intellectual Property (IP) issues. Just get out of the building.”
The next week another team, working on a new type of solid oxide fuel cell, remarked, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our IP.”
“Oops,” I said, “you’re right. In clean tech nanomaterials you guys need to be talking to patent attorneys. Don’t share the details of your manufacturing process with customers until you’ve locked up your intellectual property.”
Government Regulations I turned to the class and said, “The rest of you can keep building your company and shipping your product because you don’t need to worry about government regulations. You’re a startup, just get your product out the door.”
The next week another group raised their hands, “Professor Blank, we’re building a medical device and there’s something called the 510K that the FDA requires, and that’s a two-year process.”
Verticals Are Different I began to realize that entrepreneurs (and their professors) act like every vertical market and industry has the same set of rules. The guidelines I had originally proposed to my students worked for enterprise software or Web 2.0 startups, but medical device, biotech and cleantech startups required radically different approaches.
So the first heuristic is: do not assume the startup rules are the same for all vertical markets.
Now when my students begin their team projects, I list 13 vertical markets on the whiteboard. Just for discussion, the markets I chose were:
Web 2.0,
enterprise software
enterprise hardware
communications software
communications hardware
consumer electronics
games software
Vertical Markets - Click to Enlarge
semiconductors
Electronic Design Automation (EDA)
clean tech
medical devices
life sciences
personalized medicine
There’s nothing special about this list other than it represents a diverse set of markets. If your market is missing, just add it as we go through this discussion.
Entrepreneurs who have experience in the vertical market they’re entering do this analysis automatically. If you don’t have deep knowledge of the domain you are about to start a business in, you need to begin by understanding the answers to questions like these:
What vertical market are you in?
Do you have domain expertise in your market?
Do you have advisors who are domain experts in your market?
Do your potential investors understand your market?
What is it that’s unique about the market I’m in?
We’ll talk about the implications of what vertical market you’re entering in the next few posts.
I wrote this “Going to Trade Shows Like it Matters” memo as a board member after I saw our company at a trade show. Part 1 of this post offered some suggestions on going to trade shows to generate awareness. This post offers suggestions if you are going to a trade show to generate leads.
Ignore This Post The same caveat applies as in the first post; If you’re selling via the web, and trade shows seem hopelessly anachronistic, ignore this post. If you’re in markets that still exhibit at them (semiconductors, communications, enterprise software, etc.,) this may be a useful read.
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To: Marketing Department
From: Steve
Subject: Going to Trade Shows Like it Matters
Generating Leads
Ownership If your company is going to a show to generate leads, then sales owns the show. Marketing is at the trade show as a support organization. Marketing may be physically “staging” the booth, and may even it “man it,” but don’t be confused, this is the VP of Sales party. While one could argue that a trade show is just another demand creation activity akin to advertising or PR, trade shows are the closest eyeball-to-eyeball contact you’re company is going to have with customers, competitors and partners.
While the industry average says only 20% of show leads are followed up, that only happens in other companies, not yours. Going to a show to get leads is a sales function, if the leads aren’t followed up marketing won’t be supporting these kinds of trade shows out of their budgets. Period. This is worthy of an open and honest discussion with sales up front. Just as marketing needed sales agreement that it was worth going to shows to generate awareness, sales needs to commit to marketing that leads will be followed up.
The Goal Remember your goal is to get qualified leads into the sales pipeline. You want to maximize the number of people who give you their contact information, and gather enough information so a sales person can prioritize who to call first. This can’t happen unless you sit down with your sales team before the show and agree on who are the likely prospects. What companies should they booth team be looking for? What titles? Will there be a salesperson manning the booth so important prospects can talk to them immediately?
Promoting Your Presence The best trade show planning will fail if nobody knows you’re there. Three-quarters of show attendees know what exhibits they want to see before they get to the show. Strong pre-show promotion will let your customers and prospects know about your exhibit. Are you twittering your appearance at the show? Did you create a Facebook page for the show? Are you buying Google adwords and adsense for the show? Direct email or snail mail to the pre-registered attendees is essential. Companies that don’t do this are the same ones who would have a party without sending out any invitations.
Many people arrive at a show with a schedule of what they want to see and have little or no time for other booths, so it’s important to get on that schedule. If sales is committed to the show, they will be contacting prospects and suspects reminding them you will be there. And inviting to the booth/dinner/private demo. While marketing can help, if sales isn’t fully engaged in this activity it’s a bad sign.
Follow-up as a Priority While 80% of show leads aren’t followed up in other companies, it doesn’t happen in yours. Lead follow-up is your number one priority after a show, taking precedence over just about everything else — including catching up on what you missed while you were out of the office. Rank your leads by level of importance and interest, and base your post-show efforts on these priorities. Make sure that sales is emailing/ phoning/ texting the hottest prospects within a week after the show ends — the longer you let them sit, the staler they’ll become.
Send everyone else who gave you a lead some kind of follow-up email/paper mailing.Your post-show email or mailing can be as simple as a thank-you note or a brochure with a cover note. Write it before you leave for the show, so you can send the mailing immediately upon our return. Send PDF versions of brochures and product sheets as soon as you get back to the office. Have enough dead-tree brochures and product sheets on hand before the show so you can snail-mail out the information after you emailed it. You’d be surprised how effective sending a paper followup to a PDF can be.
Measurement We measure everything. Particularly leads. It’s pretty simple. a) How many overall leads did you generate, b) how many leads ended up in the sales pipeline, and c) how many leads ever turned into an order.
To close the loop between leads and orders, always offer a sales commission bonus for orders that came from leads followed up from a show. It’s amazing how effective how a bonus can be. If leads from this show do not turn into orders, why are we going again next year?
General Comments for both Awareness and Lead Generation Demo’s I don’t care how small the booth or trade show is, do a canned demo every 20 to 30 minutes regardless of whether anyone is at your booth or not. The demo repeats the one or two key messages you decided were most important. Assume everything you’re showing will be seen by every one of your competitors, so this is not the place for showing the “secret new release.” You can do that in a private hotel suite for important prospects.
Demo’s are the heart of the booth. Without one, you’ll be having your booth staff standing in the aisles mournfully waiting for someone to walk up to them. Or worse, your salespeople will be talking to each other looking like they’re too busy to be interrupted. In both cases, that means you’re broadcasting “nothing interesting is in this booth folks, keep walking.” A continual demo lets you act like you have something important to share. Your sales people can gather the crowd, work the crowd and use their sales skills to see if prospects in the audience have interest. The difference between booths offering a demo and those without one is striking. One of them is a loser. It isn’t going to be your booth.
Competitive Analysis Unless you are at the wrong show your competitors will be there as well. Someone from your company has to be designated the official competitive intelligence officer for this show. They are in charge of coordinating collection of competitive data, and preparing a summary report which contains facts as well as analysis. Get competitors literature, press packets from the press room, sit through their demos, and don’t come home until you know everything they’re saying. At the same time keep an eye out for competitors at your booth, (they may not be wearing their own company’s badges.) Welcome them loudly and openly. Put your arm around them and walk them around your booth. Make sure the staff is trained to never disparage a competitor. (Either at the show or anywhere else.)
Partnership Opportunities At any show you are attending there has to be tons of opportunity for business to business relationships you hadn’t thought about. Everyone should have a chance to walk the floor looking for deals, technology, distribution, customers, etc. Someone from your company has to be designated the opportunitymonitor, responsible for coordinating potential partner information and disseminating it in writing after the show.
No Literature at the Booth Fancy brochures are expense, and most trade show literature ends up on the hotel room floor. Have sample literature under Lucite and chained to the booth. Take imprints of badges in exchange for paper literature requests. Each imprint is now a lead. (Keep a stash of literature for real live prospects under the table, but they should be pulling out their wallet to buy before you let go of it.)
Booth Staffing You can’t do it alone. Even if it’s a small 10-foot booth you will need at least one person to “spot” you when you leave the booth to take a break or to check out the competition. For bigger booths a good rule of thumb is to have two to four staffers for every 100 square feet of exhibit space.
Even for the smallest trade show, no one shows up without booth training. (Messages, themes, demo’s. Everyone should be articulate and agile in describing and demoing the products.) And if you don’t show up for booth training, work somewhere else. (I’ve always visibly sent someone home from a tradeshow for missing training or booth duty. It makes the point and becomes company lore. You’ll never have to do it again.) Everyone should understand your goals, your messages, your demos and your theme and know their role. If your don’t have enough employees on the payroll, hire relatives, friends, or part-timers and train them.
Trade Show Post Mortem Evaluate the experience.
Physical booth: What worked? What didn’t?
Demos/Equipment: What worked? What didn’t?
Messages/theme: What worked? What didn’t?
Staffing: What worked? What didn’t?
Write it down and keep it in a tradeshow handbook for those who will follow.
Ignore This Post If you’re selling via the web and trade shows are something your grandfather told you about, ignore this post. If you’re in markets that still exhibit at them (semiconductors, communications, enterprise software, medical devices, etc.,) you know they’re expensive in time, dollars and resources.
I wrote this “Going to Trade Shows Like it Matters” memo as a board member after I saw our company at a trade show. My observation was that they had the “Going to Trade Shows” part down, they just needed to add the “Like it Matters.”
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To: Marketing Department
From: Steve
Subject: Going to Trade Shows Like it Matters
Setting Clear Trade Show Objectives There’s no use going to a show if you don’t know why. Answers like, “because our competitors are there,” or “because it’s on our calendar,” or even “because I think we should,” don’t cut it. (Remember your department has a mission.) There’s a plethora of reasons why a company would want to exhibit at a show:
write sales orders
generate leads for future sales
research the competition
spot trends
generate awareness and visibility within the industry
build our mailing list with quality names
find better or cheaper suppliers
build rapport with current customers
get press
generate excitement around a new product introduction
get additional partners
recruit staff
The problem with this list is that every company can find at least five things they like on it. For a small company this is like throwing your tradeshow money on the floor. A company must pick the one or two top goals or nothing useful will happen.The number one reason a small company is going to a tradeshow is to generate awareness. As the company gets larger and a large professional sales organization kicks in, its second priority is to generate qualified leads. This doesn’t mean that there aren’t tertiary goals, but they are just that – not the top one or two.
Before you go to a trade show sales and marketing need to agree to measurable goals. Everything you do before, during, and after the show should be evaluated in terms of whether it contributes toward reaching these goals. While marketing can decide they are going to the show to generate awareness, marketing can’t decide they are going to a show to generate leads – unless the VP of Sales says that they believe those leads will be valuable and sales has a plan to follow up on those leads.
If sales doesn’t think the show is worth going to for the leads, and marketing isn’t going to generate awareness, remind me – why are you going to this show?
Generating Awareness Ownership If your company is going to a show to a tradeshow to generate awareness, then marketing owns the show, and sales is there for support. Do not assign any sales people to the show who feel they “have something better to do,” 1) they might actually do (like closing an order) and, 2) bad sales attitudes are contagious.
Budget A test for whether a show is worth going to generate awareness, is to total up the show budget. Then offer those budget dollars to the VP of Sales. They have a choice; they can tell you not to go to this show and they can use your show budget for anything they want in sales; or they can let you go to the show to use those dollars to create awareness for them. If the VP of Sales doesn’t think that generating end user awareness and ultimately demand for them is worthwhile, then one of you is an idiot. Hope it’s not you.
Once you know which show you’re going to and what your goals are, draw up a budget. Without a budget, costs can quickly spiral out of control (last minute impulse purchases to jazz up your booth, for example) and defeat your best laid plans. A rule of thumb is that your space costs represent about a quarter of your total show budget. So when you know what you’ll be paying for space rental, multiply it by four, for a rough idea of your expenses.
The Message Sitting around a conference room table brainstorming messages that might resonate with customers, or worse having a PR agency doing that for you, is a firing offense in a small company. You should be brainstorming messages with current and potential customers. Your messages should have been pre-tested with prospects and existing customers way before you go to a show.
Say it Loud Attendees are looking at hundreds of booths each screaming messages at them. Why are your messages going to stand out? Show-goers can’t sort through a pile of inarticulate or barely whispered thoughts. Pick just one or two key ideas that you want to get across at the show and train yourself and your staff to “stay on message”. Then that message needs to be translated into a theme for the booth, the staff and the show.
Then shout the messages out (virtually) at the top of your lungs. Visually, demo’s, wild colors, etc. If you think you are going to offend your customers or embarrass your engineering organization, get out of the marketing department. IBM doesn’t have to shout to get noticed, but you do. Design your graphics, pre-show promotion, literature and show directory advertising around your focused message and theme. However, scantly clad women, children and animals (in any combination) are still in bad taste.
Promotions attract booth traffic Promotions and give-away’s drive traffic to your booth. Offer a free bestselling book in your industry (can you have the author there to autograph it?); Hold a contest, (If you’re giving away a big prize make sure your most valuable prospect wins.) Have a loud product demo; give away pieces of candy; hire a masseuse and offer free back rubs. While the promotion needs to fit your company’s image and the demeanor of the attendees, I’ll tell you that I’d be giving away dating-service T-shirts at the bereaved widows’ convention.
Location, location, location A small booth is no excuse for being stuck in the corner. Don’t tell me “that’s where they put all the small booths.” I know that, so why do I need you? Get yourself into the booth selection meetings and get to know the manager. Call often and early and try to upgrade your location. Shoot for a high-traffic location. Be sure to look at a floor plan before you choose your site. Foot traffic is heaviest in certain areas of a typical trade show floor. Look for locations near entrances, food concessions, rest rooms, seminar rooms, or close to major exhibitors. Try to avoid dead-end aisles, loading docks, obstructing columns, or other low-traffic regions.
Partners Booths While your booth may be small, some of your potential or existing partners may have much larger ones, in much more visible locations. Figure out how to get your equipment into every other big booth we can. But it has to come with one of your people to talk about the product. If you tell me we can’t find any established exhibitor whose products or services complement ours to let us in, I question why you are going to this show.
Tradeshow Seminars Almost all tradeshows have conferences and seminar sessions; is your company keynoting any? Leading or speaking at any? No is the wrong answer. If there aren’t any that match your company, create some. You ought to know who the conference or seminar chairman is a year a head of time, and they certainly ought to know you. I can’t imagine your company going to a tradeshow to create awareness and not being a speaker. (That means neither can you.)
Preshow Publicity Does your company have any new announcements to make at the show? Are you twittering your appearance at the show? Did you create a Facebook page for the show? Are you buying Google adwords and adsense for the show? Did you issue any press releases targeted at the trade publications and local papers that will be covering the show? Has the company talked to key industry analysts/press pre-show to ask them to stop by? Did the company send out direct mail (email or postcards) to potential or pre-registered attendees reminding them to stop by the booth? Do you have press kits for the show, (electronic and paper) and have you posted them on-line and dropped them by the physical and on-line press room?
Key Influencers Does the company have press/industry analysts scheduled for demos? Does the company have demos or dinners/lunch scheduled for key industry influencers? Is the company hosting/co-sponsoring some event? Why not?
Customer Discovery Sitting inside of your company you’ve made a whole bunch of assumptions about who your customers are and why they will buy. Now there are thousands of real live customers walking around the show floor with facts. You need to get those facts back inside our building. What are all the questions you’ve ever had about customers? What do they read? What other shows do they go to? How would they reach them? Have they ever heard of you? Do they believe your key messages? Do they believe the problem you are solving is important? Who would buy your product?
Measurement How do you measure success at a tradeshow where the goal was generating awareness? Ask the potential customers who actually came to your booth and call them after the show. Take all the leads you got at the show (yes you are collecting leads even though you’re at the show to generate awareness) and follow up. Ask them what they thought of your company/product before/after the show. What message did they take away? Did this help them to understand your company/product
Part 2 of the memo, to be posted tomorrow: using a trade show to generate leads. Plus tips on overall trade show strategy.
Startup CEO Traits I was having lunch with a friend who is a retired venture capitalist and we drifted into a discussion of the startups she funded. We agreed that all her founding CEOs seemed to have the same set of personality traits – tenacious, passionate, relentless, resilient, agile, and comfortable operating in chaos. I said, “well for me you’d have to add coming from a dysfunctional family.” Her response was surprising, “Steve, almost all my CEO’s came from very tough childhoods. It was one of the characteristics I specifically looked for. It’s why all of you operated so well in the unpredictable environment that all startups face.”
I couldn’t figure out if I was more perturbed about how casual the comment was or how insightful it was. What makes an individual a great startup founder (versus an employee) has been something I had been thinking about since I retired. My comfort in operating in chaos was something I first recognized when I was working in the Midwest.
The Rust Belt – (Skip this Section if I’m Boring You)
Out of the Air Force, my first job out of school was in Ann Arbor, Michigan, in the mid-1970’s installing broadband process control systems in automotive and manufacturing plants throughout the Midwest. I got to travel and see almost every type of Rust Belt factory – at the time, the heart and muscle of American manufacturing – GM, American Motors, Ford, U.S. Steel, Whirlpool. Our equipment was installed in the manufacturing lines of these companies, and if it went down sometimes it brought the entire manufacturing line down.
I always made a habit of getting a tour of whatever manufacturing plant I was visiting. Most plant foremen were more than accommodating and flattered that someone actually was interested. I was fascinated to learn how everyday objects (cars, washing machines, structural steel, etc.) that ended up on our shelves or driveways were assembled.
My favorite factory was the massive U.S. Steel plant by Lake Erie. On my first visit the foreman walked through this enormous building, not much more than a giant steel shed, where they had an open hearth furnace. We came in time to see the furnace being tapped, pouring steel out into giant buckets. (Years later I realized I watched the end of an era. The last open hearth furnaces closed in the 1980’s.)
We stood on a platform several stories up and light streamed diagonally through windows set high on top of the building cutting through the black soot particles created when the incandescent steel hit the bucket. It was too loud to talk so I just watched the steel pour through the clouds of soot backlit by the blinding bright liquid metal. It looked like an update of the iconic image of Penn Station writ large.
And as I stared through the billowing clouds of soot flashing between black and white took on fantastical shapes as tiny figures on the factory floor scurried around the bucket. I could have stayed there all day.
Automobile plants were equally fascinating. They were like being inside a pinball machine. At the Ford plant in Milpitas the plant foreman proudly took me down the line. I remember stopping at one station a little confused about its purpose. All the other stations on the assembly line had groups workers with power tools adding something to the car.
This station just had one guy with a 2×4 piece of lumber, a large rubber mallet and a folded blanket. His spot was right after the station where they had dropped the hoods down on the cars, and had bolted them in. As I was watched, the next car rolled down the line, the station before attached the hood, and as the car approached this station, the worker took the 2×4, shoved it under one corner of the hood and put the blanket over the top of the hood and started pounding it with the rubber mallet while prying with the lumber. “It’s our hood alignment station,” the plant manager said proudly. These damn models weren’t designed right so we’re fixing them on the line.”
I had a queasy feeling that perhaps this wasn’t the way to solve the car quality problem. Little did I know that I was watching the demise of the auto industry in front of my eyes.
Operating in Chaos Repairing our equipment could be time critical. One day, I was at the Ford Wixom auto assembly plant training my replacement and I was at met at the door by an irate plant manager. He welcomed us by screaming, “Do you know how much it costs every minute this line is down.” As I’m troubleshooting our equipment scattered across the plant, (in the computer room, above the steel, in NEMA cabinets next to line, etc.,) the manager followed us still yelling. My understudy looked at me and said, “how can you deal with this chaos and still focus?” And until that moment I had never thought about it before. I realized that what others heard as chaos, I just shut out.
A Day in the Life of A Founder For those of you who’ve never started a company, let me assure you that it never happens like the pleasant articles you read in business magazines or in case studies. Founding a company is a sheer act of will and tenacity in the face of immense skepticism from everyone – investors, customers, friends, etc. You literally have to take your vision of the opportunity and against all rational odds assemble financing, and a team to help you execute. And that’s just to get started.
Next, you have to deal with the daily crisis of product development and acquiring early customers. And here’s where life gets really interesting, as the reality of product development and customer input collide, the facts change so rapidly that the original well-thought-out business plan becomes irrelevant.
If you can’t manage chaos and uncertainty, if you can’t bias yourself for action and if you wait around for someone else to tell you what to do, then your investors and competitors will make your decisions for you and you will run out of money and your company will die.
Great founders live for these moments.
Creating the Entrepreneurial Personality – A Thought Experiment Fast forward three decades back to today. The lunch conversation was an interesting data point to add to a hypothesis I’ve had.
I’ve wondered, just as a thought experiment, how would we go about creating individuals who operate serenely in chaos, and have the skills we associate with one type of entrepreneurial founder/leader?
One possible path might be to raise children in an environment where parents are struggling in their own lives and they create an environment where fighting, abusive or drug/alcohol related behavior is the norm.
In this household nothing would be the same from day to day, the parents would constantly bombard their kids with dogmatic parenting, (harsh and inflexible discipline,) and they would control them by withholding love, praise, and attention. Finally we could make sure no child is allowed to express the “wrong” emotion. Children in these families would grow up thinking that this behavior is normal.
(If this seems unimaginably cruel to you, congratulations, you had a great set of parents. On the other hand, if the description is making you uncomfortable remembering some of how you were raised – welcome to a fairly wide club.)
Over the last 5 years I’ve asked over 500 of my students how many of them grew up in a dysfunctional family (participation was voluntary.) I’ve been surprised at the data. In this admittedly very unscientific survey I’ve found that between a quarter and half of the students I consider “hard-core” entrepreneurs/founders (working passionately to found a company,) self-identified as coming from a less than benign upbringing.
Founders as Survivors My hypothesis is that most children are emotionally damaged by this upbringing. But a small percentage, whose brain chemistry and wiring is set for resilience, come out of this with a compulsive, relentless and tenacious drive to succeed. They have learned to function in a permanent state of chaos. And they have channeled all this into whatever activity they could find outside of their home – sports, business, or …entrepreneurship.
Therefore, I’ll posit one possible path for a startup founder – the dysfunctional family theory.
Throwing hand grenades in Your Own Company One last thought. The dysfunctional family theory may explain why founders who excel in the chaotic early phases of a company throw organizational hand grenades into their own companies after they find a repeatable and scaleable business model and need to switch gears into execution.
The problem, I believe, is that repeatability represents the extreme discomfort zone of this class of entrepreneur. And I have seen entrepreneurs emotionally or organizationally try to create chaos — it’s too calm around here — and actually self-destruct.
So What? Lets be clear, in no way am I suggesting that growing up in a dysfunctional family is the only path to becoming a founder of a startup. Nor am I suggesting that everyone who does so turns out well. And in particular I’m not suggesting that every employee who joins a startup fits this profile, it just seems more prevalent in the founder(s).
And this hypothesis might be a good example of confusing cause and effect. Yet I am surprised given how much is written about the attributes of a startup founder, how little has been written about what “makes” a founder.
Let me know what you think. Does any of this match your experience or people you know?
At some point in my career as I began to ponder how/why startups morph from agile, “can do” companies to ones that have lost their edge. I didn’t need to look much further than the “new building” debacle I had a hand in.
Signs of Success
One of the things you do right in a startup, is you move from one cheap and cramped building to another as you grow, with desks, cubicles and engineers piled cheek to jowl.
One of the signs of success is when you outgrow your last cramped quarters and can afford a “real” building. This happened to us at SuperMac when our sales skyrocketed.
That’s when things went south.
Lets Fix Everything that Was Broken
At SuperMac we were excited to finally get out of the crummy tiltup we had occupied since the company emerged from bankruptcy. Now with cash in hand, we wanted to fix everything that seemed broken and annoying about our office environment. We made what seemed to be a series of logical and rational decisions about what to do with our next office building.
Engineers were packed in cubicles or desks right on top of each other?
Now every engineer can have their own office.
We can’t bring customers to this rundown building. The new building needs to reflect that we’re a successful and established company.
The lobby of the last building didn’t “represent” the company in a professional manner.
Lets “do it right” and have a lobby and reception area that projects a professional image.
We had used, crummy and uncomfortable furniture.
Lets get comfortable chairs and great new desks for everyone. None of this used stuff.
The last building has stained carpets and walls that haven’t been painted in years.
Now we can pick out carpets that look good and feel good and we can have clean walls with great artwork and murals.
We didn’t have enough conference rooms.
Lets make sure that we have plenty of conference rooms.
Everyone left the building for lunch. We need our own cafeteria so employees don’t have to leave the building.
Designing the Perfect Building Once the commitment to fix everything wrong was in place, we were off and running on the design phase. We hired an interior designer and a great facilities person to manage the process. The exec staff started meeting about the design of the new building.
The company decided that now engineers can have their own offices rather than cramped cubes. The staff got involved about what color the carpet and walls are. And there was lots of discussion of what style of furniture is appropriate.
Our exec staff spent time worrying about who had the corner office, and what departments had the “prime” location. (I was great at “office wars.”) There was lots of talk about the importance of natural lighting and maybe we needed our own cafeteria. And even better, marketing got to design the graphics for the lobby and hallway (bright and colorful neon) to better represent the color graphics business we were in.
We kept the board informed, but they didn’t have much to say since business was going so well, and a new building was needed to accommodate the growing company.
None of This is Good News
This is when things started to go downhill for SuperMac. The most obvious problem; the time we spent planning the building distracted the company from running the business. But there were three more insidious problems.
While offices for everyone sound good on paper, moving everyone out of cubicles destroyed a culture of tight-knit interaction and communication. Individuals within departments were isolated, and the size and scale of the building isolated departments from each other.
The new building telegraphed to our employees, “We’ve arrived. We’re no longer a small struggling startup. You can stop working like a startup and start working like a big company.”
We started to believe that the new building was a reflection of the company’s (and our own) success. We took our eye off the business. We thought that since we in such a fine building, we were geniuses, and the business would take care of itself.
While our competitors furiously worked on regaining market share, we were arguing about whether the carpets should be wool or nylon. The result was not pretty.
The Curse of a New Building If this was just a sad story about a single company, it would be interesting, but not instructive. However, I’ve seen this story repeated time and again, and not just in Silicon Valley. There’s a mindset that says, “By the dint of our hard work, we are “entitled” to a building upgrade and this is our just reward.” And on an emotional level it makes sense. But if you are lucky you have a board of directors who have seen this before. (And they’ll take the CEO out for a trip to the woodshed.)
An upgraded new building is a premature transition away from a startup culture.
This is a culture and values issue worth fighting over.
Letting this happen is a failure of a board. If the management team is thinking they’ve made it, the new building is just symptomatic of a company heading for a crash. It’s a company that’s lost sight of the values that got it there.
Don’t let it happen to you.
Stay hungry, stay lean.
Lessons Learned
New buildings are a distraction. You should avoid them at all costs
Part of marketing is the ability to communicate a message to thousands of people and convince them to believe your version of reality. When I was 19 I accidentally had a test run of my ability to do so. I created havoc at an air force base by convincing thousands of airman that gravity would be turned off so that the Air Force could make repairs under their buildings.
Two Million Students First some background. Ever since WWII U.S. Air Force aircraft have carried sophisticated avionics equipment – radar, navigation, electronic warfare, etc. While the sharp end of the stick were the pilot and/or crew, each of these systems required a cadre of technicians to maintain and repair the equipment. Keesler Air Force Base in Biloxi Mississippi was the Training Center responsible for teaching 10’s of thousands of students a year how to repair radar, communications, and electronics. Some 2 million students have trained there since it opened in 1942. Think of it as the ultimate vocational training school.
Trade School At the height of the Vietnam War, I was at Keesler learning how to repair electronic warfare equipment, a skill which had gone from theory (our B-52 bombers might one day have to use this stuff –once – penetrating the Soviet Air Defense system) to practice (our fighter/bombers were encountering the murderously effective North Vietnamese air defense system every day.)
In hindsight the USAF did a damn good job. We spent the first five months learning basic electronics theory and the next months getting our hands dirty with the theory and practice of electronic warfare receivers and jammers. As it was a vocational school, I think the most math we had to do was to figure out whether we got a passing grade, and no one was in any danger of actually designing new equipment, but I left with an excellent education in troubleshooting, and solving complex problems in real-time.
Duality – Student Life – in the Military Here we were, thousands of students with an average age of 19 going to school and living in barracks on the airbase. The barracks were like college dorms except we had to polish the brass doorknobs, wax and buff the hallway floors and make our beds. We attended classes from 6am to noon – five days a week. And we had to march to class (I’m convinced it was the only way they figured they were going to get us up and out of bed at that hour).
There was a duality to our existence. On one hand, we were in a rigid command and control system where we had to follow orders, salute officers and understand the military hierarchy, yet on the other we were in an educational institution where we were encouraged to ask all the questions you wanted. And we had afternoons and weekends off. We could go off base and do anything a group of 19-year olds wanted to, like skydiving, but that’s another story.
Library Hours
I loved libraries since I was a kid. Growing up in New York, the library was the only calm and stable place in my life, a refuge from home. I read my way through our small neighborhood library.
My fondness for libraries and my reading habit carried through to the Air Force, and this technical school had an awesome technology library. One day I opened up a Scientific American magazine and read an article on a prank that had been pulled at CalTech the year before. And something about the story clicked for me. I thought that this practical joke would be even funnier in a military organization than it was at Caltech. (I’ll describe the actual prank in a bit.)
Alone with Letterhead Every evening someone in the barracks had to serve as the “fire warden” for the night. In hindsight, fire warden meant you were a manual smoke alarm. You walked around the barracks and made sure the building wasn’t on fire. (Anytime you put 10,000 19-year olds on a base you can bet one of them will go to sleep with a cigarette and burn his mattress, if not the building.)
The other minor duty of the fire warden was to update the squadron bulletin board. This was the one place you had to go daily to read all the official notices, and orders. Reading official military notices and memos always seemed funny to me as they had the most verbose and obtuse ways of saying even the simplest things. You usually had to read two pages to realize the memo said, “No Smoking Indoors,” or “Mandatory meeting on Thursday.”
Following Orders One night it was my turn on fire warden duty, and with way too much time on my hands, I was mulling over the philosophical contradictions of the literal interpretation that my fellow military students placed on even the most trivial orders. Orders didn’t have to make sense, we were told, “an order is an order. Don’t think, just follow it.” I wondered how far that would really go.
Then I thought of the Caltech prank. If it worked on a college campus, I wonder what would happen on a military base?
So working into the wee hours of the morning I typed up a version of the Cal Tech prank (on official base letterhead,) translating it into military phraseology. I typed 30 copies, and using the master key I went into every squadron building bulletin board, and posted these orders from the base commander on all 30.
The memo I posted looked something like this:Friday Formation I had posted my memo on Wednesday, got a good chuckle over it and promptly forget all about it. I thought it was very funny, a good one-time joke and people would laugh and then remove it from the bulletin board. But a few days had passed, and I hadn’t heard anything, so I thought the joke had fallen flat on its face.
Every building/squadron had an officer in charge of us, and all 300 hundred or so would gather in the courtyard every Friday for our squadron meeting, where our lieutenant would give us orders for the weekend, (usually have a good time) and answer any questions.
We’re standing in the Friday squadron formation, and the lieutenant comes out, who is all of 22 years old. The sergeant calls, “Squadron a-ten hut,” we all snap to attention. The lieutenant reads the orders of the weekend, blah, blah, blah, and then says, “okay, any questions?” And usually there weren’t any questions because everyone wants to go and be dismissed for the weekend. But today was going to be a bit different.
I’m ready to run for the gate, but wait, there’s a raised hand.
“Sir, about the gravity being turned off, what if we have fish? Should we cover their bowls?” I almost burst out laughing surprised there was at least one person in the squadron who believed the memo. The lieutenant is silent for a long minute, staring at the airman who asked the question, and calculating whether he heard it correctly or was being made fun of. But before he could respond, someone else raised his hand and says, “Sir, what if we have small children and they’re crawling, and we can’t get them off base, will they affected by the gravity?”
Ok, I think, maybe there were two.
But that was the cue for 10 more people simultaneously to burst out with questions, (“How about motorcycles will they be OK? Can we go to the bathroom when the gravity is turned off?”) And I started to panic as it dawns on me that this conversation is occurring 30 times the 300 people in each of the 30 squadrons on this airbase.
The lieutenant looks stunned. Were we all on drugs? What on earth were we talking about? He sent the sergeant to get the memo from the bulletin board, reads it and he starts looking really confused. It can’t be real, but yet… it does look like an official order from the base commander.
The lieutenant leaves to call the base commander,(about the same time 29 other lieutenants were doing the same.) “But sir, the order came from you.” An hour and a half later we finally get dismissed with a, “Ignore that order, it wasn’t really an order.”
Years later at different air bases, at the most unexpected times, I’d hear someone bring up, “Hey, were you at Keesler when they had those orders about the gravity being turned off?” And I always say, “No, never heard of it, tell me about it.” The story was even better when someone else told it.
I was lucky to have been standing in the right place when video became part of the Macintosh. And I got to experience a type of customer buying behavior I had never seen before – the Novelty Effect.
Present at the Creation It was early 1991 and Apple’s software development team was hard at work on QuickTime, the first multimedia framework for a computer. At the time no one (including Apple) knew exactly what consumers were going to do with multimedia, it was still pre-Internet. But the team believed adding video as an integral part of an operating system and user experience (where there had only been text and still images) would be transformative.
But Apple had planned to announce and demo QuickTime without a way to get video into the Mac. They had this great architecture, and Apple had figured out to get movies into their own computers for a demo, but for the rest of us there was no physical device that allowed an average consumer to plug a video camera or VCR into and get video into a Mac.
A month or two before the QuickTime public announcement in May, the SuperMac hardware engineers (who had a great relationship with the QuickTime team at Apple) started a “skunk works” project. In less than a month they designed a low-cost video-capture board that plugged into the Mac and allowed you to connect a video camera and VCR. But to get video to fit and playback on the computers of the era, they needed to compress it. So SuperMac engineering also developed video compression software, called Cinepak. The software was idiot proof. There was nothing for the consumer to do. No settings, no buttons – plug your camera or VCR in and it just worked seamlessly. (The Cinepak codec was written by the engineer who would become my cofounder at Rocket Science Games.) It worked great on the slow CPUs at the time.
Something Profound Engineering gave us a demo of the prototype board and software and asked, “Do you guys think we can sell a few of these boards?” Remember, this is the first time anyone outside of Apple or the broadcast industry had seen moving images on a Macintosh computer. (A company called Avid had introduced a $50,000 Mac-based professional broadcast video editing for two years earlier. But here was a $499 product that could let everyone use video.) Our engineers connected a VCR, pushed a button and poured in the video of the Apple 1984 commercial. We watched as it started playing video at 30 frames/second in a 320 x 240 window.
Up until that moment Quicktime had been an abstract software concept to me. But now, standing there, I realized how people felt when they saw the first flickering images in a movie theater. We must have made them play the demo twenty times. There were a few times in my career I knew at that moment I was watching something profound – (Holding the glass masks of the Z80 microprocessor. My first IPO at Convergent. First silicon of the MIPS RISC processor.) I stood there believing that video on computers was another – and equally as memorable.
Lets Sell it Like There’s No Tomorrow When we all regained the power of speech, our reaction was unanimous, “What are you talking about – can we sell it? This is the first way to get video into a computer, we’re going to sell and market this board like there’s no tomorrow. Even though we won’t make a ton of money, it will be an ambassador for the rest of our product family. People who aren’t current customers of our graphics boards will get to know our company and brand. If we’re smart we’ll cross-sell them one of our other products. We might even sell a few thousand of these.”
Everyone laughed at such an absurd number.
The Video Spigot “What are we going to call it?” Lets see…, it’s video input, … how about we call it the Video Spigot?”
Now, in hindsight, with a spigot, you’re actually pouring stuff out, and, in fact, the ad actually shows you stuff pouring stuff out, but into your Mac. It made no logical sense (a fact engineering reminded us about several times.) But it made the point that this device could pour video into your Mac and consumers instinctually got it.
Our CEO and our VP of manufacturing were incredibly nervous about manufacturing more than a few hundred of these boards. “There’s nothing to do with this product once you get the video in. You can’t manipulate it, you can’t do anything other than playback the video in QuickTime.” And they were right. (Remember there were no video applications available at all. None. This was day zero of consumer video on the Mac.)
Our answer was, “People will love this thing, as long as we don’t oversell the product.” We knew something our CEO didn’t. We had seen the reactions of people playing with the prototypes in our lab and when we demo’d it to our sales force. When we saw our salespeople actually trying to steal the early boards to take home and show their kids, we knew we had a winner. All we had to do was tell customers they could get video into their computer – and not promise anything else.
But the rest of the management team really skeptical. We kept saying, “Don’t worry, we’re going to sell thousands of these.” Little did we know.
We launched the product with this ad that said “Video Spigot, now pour video into your computer,” and this just hit a nerve.
We sold 50,000 Video Spigots in six months.
(As an aside, we saved money by putting my daughter in the ad. (That’s every marketeers excuse for putting their kids in an ad.) She’s in the little car on the monitor, and she’s also, if you look very carefully, in the water. We had that little car around the house for a while.)
They’re All Coming Back So, manufacturing ramped up our factory, and as we’re selling 10,000 Video Spigots a month, our CEO is now concerned that maybe all these boards were all going to be returned to us because they didn’t really do anything once you got video into your computer. (A rational fear, as the sum of all of our other graphics boards shipped was about 7,500/month.)
Marketing knew who the Spigot customers were; we had all the registration cards and all the data. So we turned to our customers, surveying a few hundred people who had bought the product and asked:
Question: Were you the person who bought the board? Answer: Yes.
Question Are you happy with the board? Answer: Oh, it’s great.
Question Are you using the board? Answer: No.
Question And … wait a minute, you’re not using it anymore? Answer: No.
Question So do you want a refund? Answer: No, no.
Question Why not? Answer: It did everything you said. We loved this product.
It didn’t do anything else. People loved it, they used it, and they put it in their desk drawer.
We accidently had a product with the Novelty Effect.
The Novelty effect I didn’t recognize the behavior at the time, but anyone who loves technology and gadgets has at one time or another has bought a technology toy – USB memory sticks, iPod Shuffles, umbrellas with LED lights, alarm clocks that talked, Flip Video Cameras, etc. – used them for a while and then stuck them in the drawer. The product does what it said it would, and amuses you for a while. You don’t regret the purchase price because you got entertained and then you lose interest - the Novelty Effect.
Unintended Consequences – Video Editing As these boards are flying out the door, one of the software engineers at SuperMac got to thinking about what did you do with video once you did get it into a computer – so he wrote the first Quicktime-based video editor which we called ReelTime.
But you probably never heard of ReelTime. You may know it by its final name.
Since we had gotten out of the software business when we came out of Chapter 11, and our sales channel didn’t know what to do with software, we licensed ReelTime to Adobe. And, of course, Adobe said, “Oh, by the way, you don’t mind if the software engineer comes with us, do you?”
Adobe renamed ReelTime to Adobe Premiere. And Randy Ubillos, its author, went on to author Mac-based video editing software for the next 18 years. His team wrote what became FinalCut Pro at Macromedia; it was bought by Apple, and now he’s at Apple doing new versions of iMovie.
So an unintended consequence of the VideoSpigot, and to the benefit of video editors everywhere, video editing for the masses was invented at SuperMac.
Thanks to Bruce Leak and the Apple QuickTime team, Peter Barrett for Cinepak and Randy Ubillos for giving us video editing on the Mac. It was fun watching it happen.
I Love Business Plan Competitions
I had a breakfast with a friend who has founded a few companies in Thailand and started the New Ventures Program at one of their universities. He was visiting Stanford and mentioned how proud he was that several of his Thai students were here in the States for a business plan competition.
For those of you who don’t know, business plan competitions are held by universities who get their students to enter and compete to see who has the best business idea. Local venture investors and/or companies offer cash prizes for the winners. In exchange, these VCs/companies get early looks at new deal flow and offer aspiring entrepreneurs feedback and advice on their business plan.
These competitions started in the early 1980‘s at the University of Texas and have sprouted like mushrooms in the last 10 years. Just Google the term and you’ll be amazed. Almost every university, region and car wash now has a business plan competition; the rules, who can participate, how large the prizes and who are the judges vary by school.
Over scrambled eggs and diet coke, I listened to this seasoned startup veteran describe the excitement of his students who came to the U.S. to compete. I finally understood how valuable these contests can be for students in cities or countries without a venture capital or entrepreneurial infrastructure. At a university business plan competition, for the first time they can swim in the sea of expertise that we/I take for granted in the middle of Silicon Valley. Win, lose or draw, these students have a life changing experience where they can network and get smarter as they see what good startup thinking looks like.
I love business plan competitions (and with my valley-centric bias, I think Berkeley and Stanford have two of the best.) If you are outside of Silicon Valley, you ought to jump into them with both feet. You’ll learn a lot.
I Hate Business Plan Competitions
Yet this same conversation reminded me why every time students at Berkeley or Stanford tell me they’ve entered a technology business plan competition, I question whether they are wasting their time.
For all the reasons why business plan competitions are wonderful for students from outside the U.S., or even outside of Silicon Valley, I am left speechless when a student in a 50-mile radius of Sand Hill Road (who tells me they’re serious about starting a company) thinks their time is better spent entering one.
I have seen students spend well over a year refining a business plan competition pitch when they have could have gotten the same advice within a month by literally stepping out the door and aggressively pursuing it. And with the other 11 months, they could have been well into actually building a company.
In the real world, most business plans don’t survive the first few months of customer contact.
And even if they did – customers don’t ask to see your business plan.
Here’s a simple heuristic: if you are one of the lucky few who are within one- or two-degrees of separation of venture capital and startup resources(law firms, patent attorneys, etc.)and you are chasing a technical business plan competition, you are signaling that you really don’t want to start a company. (And that may be fine with you. Just don’t confuse the time you’re spending with actual progress in building a company.)
I hate business plan competitions – when they encourage students to write a “winning plan” rather than teaching them how to get out of the building and use locally available resources to start a company.
The Sharp End of the Stick At some point in my career as I began to formulate thoughts about mission and intent, I started to think about the broader role of marketing in a growing technology company. It became clear to me that the mission of marketing in most companies has to be to support sales. While this may seem obvious to anyone not in sales and marketing, trust me, in a technology company this is a conceptual breakthrough. In my experience, every marketer with an MBA wants to “do strategy.” Every marketing communication hire couldn’t wait to produce the next great ad or PR program. Every product marketer thought they should help define the product feature set, etc. But without sales there is no revenue, and without revenue there is no company. All the strategic thinking in the world won’t make up for a missed revenue plan.
Sales was the Sharp End of the Stick, and Marketing was the Stick The epiphany for me was that in any company where I was running the marketing department, marketing’s number one job (its mission) would be to support sales – and to make the (commission-driven) sales VP the highest-paid person in the company. We were going to do that by turning marketing into a machine to generate end user demand, drive the that demand into our sales channels, and educate our sales channels. And the same time we were also going to do all the other strategic stuff about pricing, positioning, promotion and customer discovery and validation to help engineering understand customer needs. But sales came first.
(By the way, companies that have a single individual as the VP of Sales and Marketing have decided that marketing doesn’t add any other value then tactical sales support, and the only way to get is to put it under the VP of Sales. That’s why you almost never see a marketer as the VP of Sales and Marketing.)
My way of explaining our support and service role to the marketing department was that:
Sales is the sharp end of the stick, and marketing at best, is the stick.
But while the sales team works for commission, the rest of the employees have equity (stock) in the company.
If sales revenue and profits are high enough, we could take the company public or sell it, and the stock would be worth more than the paper it was printed on.
In exchange for being the “point” organization, performance of a salesperson is measured continuously and individuals who fail to deliver quota are removed.
If sales as an organization failed to deliver revenue to plan then all we had were worthless shares.
In reality the sales team was working for the rest of the company to make all of our stock valuable.
No one was confused after that.
Who’s on the Sharp End In an early stage startup, instead of sales being up front, the point departments are likely to be product development and customer development. Later on in this same company’s life, sales will become the pointy end and product development moves to a supporting role. In other companies it may be that manufacturing or finance is the sharp end of the stick. In an IP licensing business, legal and finance are the sharp end of the stick. It varies by company and changes over time. There’s no magic formula but there are always “leading” departments. And all “leading” departments have some type of “consequence-based” feedback loops that make success or failure obvious.
The clearest example is the U.S. military. Combat troops are the “tip of the spear” while everyone else is the logistical tail. No one in the support chain of the troops is confused or resentful as they all understand that the greatest risk is up at the front.
Killing The Company With Equality I’ve been on boards where the CEOs took the egalitarian position that “all our departments are equal, no one is more important than any other.” The unfortunate corollary is that in these companies no department believed it was in a supporting or service role.
In these companies, departments that should have been providing support and service instead behaved like they were the “sharp end” organizations. I’ve encountered finance organizations with budget processes designed to simplify their lives, but not the rest of the company’s. Or expense reporting requirements that took hours of a sales teams time to fill out every week. Sometimes it was the legal department crafting contracts so onerous I wouldn’t even sign it, let alone expect a customer to do so. At times it was human resources with policies that made people leave rather than stay, or it was a CIO more interested in standards than deployment.
None of these departments operated with any particular sense of malice – just with the certainty that the company revolved around them. But they were misguided because they lacked a clear departmental mission statement that reminded them of the corporate goals. If each department had a mission statement, it would have been clear whether their role was in support or at the sharp end. Having each department develop a mission statement depends on leadership and direction from the CEO.
“Going Out of Business” Strategy
I’m now convinced “all our departments are equal” is a “going out of business” strategy. Not understanding who are the “lead departments” makes companies feel like ponderous, bureaucratic and frustrating places to work. The best people in the “sharp end” organizations simply vote with their feet and leave.
I loved to compete against these companies. Their own internal culture would tie them up in knots, and agile startups could run rings around them.
Don’t let this happen to your company. Embrace and then communicate the idea of a lead department(s). Build a company culture where everyone supports the “sharp end of the stick.”
While this story is about my experience in packaging for computer retail channels, if you substitute the word “web site” for retail, you’ll get the idea why these lessons were timeless for me.
SuperMac sold our graphic boards for the Macintosh through multiple distribution channels: direct sales to major accounts, national chains, independent rep firms, etc. But the computer retail channel was a large part of our sales. That meant that our boards were packaged in boxes sold to retailers and were displayed on shelves in their computer stores. Customers went into the store either looking for the SuperMac product by name (if our demand creation activities had been effective) or went in unsure of which brand of board to buy. If they were in the store but teetering on the edge of a purchasing decision, there were only two ways to influence them: incent the sales staff (give the salespeople a special bonus to sell your product) and/or have box packaging sell itself by screaming “buy me.”
Maybe It’s Me
When I got to the SuperMac, our Marketing Communications group told me about our “award-winning” retail packaging for our graphics boards. Yet when I saw our retail package, I was confused. Confused because while I knew absolutely nothing about retail packaging, as a consumer I knew this box was not something I would pay attention to. It was black with absolutely no compelling reason to buy – no awards, no why-to-buy message, nothing.
While I wasn’t an expert in retail packaging, even as a consumer I knew that when I was in a store, I scanned four or five products on a shelf, grabbed the most interesting one, read what was on the box, and picked one. And the product that “talked to me”, the loudest and most seductively, was the one that went home with me.
“Black Hole of Packaging” Strategy
Since we had no facts, other than my opinion that something wasn’t right, I took our staff on a field trip. (You can’t do marketing from inside the building.) We visited a couple of retail stores to look at how other companies were packaging their products and how ours looked next to theirs. Standing in the aisles we collectively got a sinking feeling. Our choice of black had made our retail box invisible on the shelf.
But worse, we had been relegated to the bottom shelf (death valley, since very few people look at their feet when shopping.) We were down on the bottom because no one had done any “shelf merchandizing” – that is we did not employ “rack jobbers” or the retail stores themselves to put our boxes at eye level in the right place on the shelf. (These are basic practices for companies selling through retail stores.)
We were on the bottom row – with an invisible box. We labeled this our “Black Hole of Packaging” strategy. The package had won awards all right – for the ad agency. The design was actually a negative drag on selling anything off a retail shelf.
Getting Smarter
While we all had opinions about what we should do, we realized we needed some facts from someone with retail packaging expertise. Luckily (or maybe because we were in Silicon Valley where there was a domain expert for everything) there was a very smart consultant in the retail computer space, Seymour Merrin, who preached about the importance of packaging. He had teamed up with a former product manager at P&G to deliver seminars on just this subject. We learned the basics of retail packaging: make the box eye-catching, ensure there was a “why-to-buy” message, include just enough information to close the sale, fight and pay for eye-level shelf space, etc. Her packaging class was so good that we sent every new marketer at SuperMac to take it. From grumbling skeptics, they all became packaging design converts.
We realized that we needed to take all these lessons and redesign our packaging.
You May Hate It, But You Won’t Ignore It
The results of our package redesigns were packages like “SuperMac Thunder II”. They were bright, they were loud, and they had lots of reasons to buy front and back. And for sure they were never going to win any design awards.
To check how effective our new packaging was, we ran tests at our local computer retailer. We would run in and put test versions of dummy boxes on the shelf and just watch what happened – we wanted to see if people picked up the box, and when they did what they looked at and what they read. (We would interview them after they put the box back on the shelf. And we had to convince a few of them the box was really empty.) The most interesting thing we learned was that people felt more comfortable about a product when there were words of encouragement on the package. So we started putting stickers on the packaging every time we’d win an award. People would go, “Oh, this one won the “best of MacUser Magazine benchmark” award,” and it would confirm that this was a safe purchasing choice.
Owning Marketing for our Entire Channel In thinking about the packaging story, it would have been easy to blame the agency who designed the box for poor package design. Or blame my MarCom department who approved it. But that wasn’t the root cause of the problem. It was a management problem. We had been outsourcing an important part of our demand creation strategy – packaging – to an outside agency without having the expertise to judge or manage the results. We hadn’t taken the time to learn the basics of packaging ourselves. And the final lesson was that we were keeping score on our packaging with the wrong metrics – it wasn’t about awards, it was about sales in the retail channel.
So we not only sent everyone through packaging school, we also brought the packaging design in-house. From now on we would design the retail boxes ourselves, not because we could do a better design job, but because this was a critical skill that our company and department needed to learn – using packaging to increase retail sales. When we had mastered the art, then I was ready to outsource it again, but not before this became a core competency of my department.
Oh yes, and retail sales doubled with the new product packaging.
New Century, New Channels For many of you reading this, boxes sitting on a retail shelf may seem hopelessly outdated, but the same marketing lessons hold for “award winning” web sites or social media. Your design or ad agencies can impress you with their awards, but if you’re not moving product or creating demand, you’ve missed the point.
Worry about the sales results.
What did we learn?
The only “award” in marketing that matters is sales revenue
Marketing needs to own all the marketing in a channel
Core competencies cannot be outsourced until they’re learned
I just finished reading Donovan Campbell’s eye-opening book, “Joker One“, about his harrowing combat tour in Iraq leading a Marine platoon. This book may be the Iraq war equivalent of “Dispatches” which defined Vietnam for my generation. (Both reminded me why National Service would be a very good idea.)
Campbell describes how he tried to instill in his troops the proper combat mentality.
I’ve paraphrased his speech into the language of a startup. It’s eerily similar.
Startups are inherently chaos. As a founder you need to prepare yourself to think creatively and independently, because more often than not, conditions on the ground will change so rapidly that the original well-thought-out business plan becomes irrelevant.
If you can’t manage chaos and uncertainty, if you can’t bias yourself for action and if you wait around for someone else to tell you what to do, then your investors and competitors will make your decisions for you and you will run out of money and your company will die.
Therefore the best way to keep your company alive is to instill in every employee a decisive mindset that can quickly separate the crucial from the irrelevant, synthesize the output, and use this intelligence to create islands of order in the all-out chaos of a startup.
Every potential startup founder should think about their level of comfort operating in chaos and uncertainty. It may not be for you.
The next piece of the Secret History of Silicon Valley puzzle came together when Tom Byers, Tina Selig and Mark Leslie invited me to teach entrepreneurship in the Stanford Technology Ventures Program (STVP) in Stanford’s School of Engineering. My office is in the Terman Engineering Building.
Fred Terman – the Cover Story I’d heard of Terman but I didn’t really know what he did – his biography said that he was one of the preeminent radio engineers in the 1930′s literally writing the textbooks. He was the professor who helped his students Bill Hewlett and David Packard start a company in 1939. In World War II he headed up something called the Harvard Radio Research Lab. There was plenty in his biography about his post WWII activities: chair of electrical engineering in 1937, dean of engineering in 1946, provost in 1955. He started the Stanford Honors Co-op in 1954 which allowed companies in the valley to send their engineers to Stanford graduate engineering programs.
Since I was interested in the history of Silicon Valley, Entrepreneurship, and now Terman, I began to understand that Terman had a lot to do with the proliferation of microwave companies in Silicon Valley in the 1950′s and ’60′s. But how? And why? So I started to read all I could find on the development of microwaves. That led me back to the history of radar in World War II – and a story you may not know.
What Does WWII Have to Do with Silicon Valley? Just a quick history refresher. In December 1941, the Japanese attack Pearl Harbor, and Germany declares war on the United States. And while the Soviets are fighting the Germans in massive land battles in eastern Europe, until the allies invade Western Europe in June 1944, the only way the U.S. and Britian can affect German war-fighting capability is by mounting a Strategic Bombing campaign, from England. Their goal was to destroy the German capability to wage war by aerial bombing the critical infrastructure of the German war machine.
The allies bombed the German petroleum infrastructure, aircraft manufacturing infrastructure, chemical infrastructure, and transportation infrastructure. The Americans and British split up the air campaign: the British bombed at night, the Americans during the day.
The Odds Weren’t Good These bombers flew for 7+ hours from England and over occupied Europe, through a gauntlet of intense antiaircraft fire and continuous attack by German fighter planes. And they got it coming and going to the target.
But what the bomber crews didn’t know was that the antiaircraft fire and German fighters they encountered were controlled via a sophisticated radar-guidedelectronic air defense system covering all of occupied Europe and Germany.
The German electronic air defense system was designed to detect the allied bomber raids, target and aim the German radar-guided weapons, and destroy the American and British bombers. The German air defense system had 100′s of early warning radars, and thousands of radar controlled anti-aircraft guns, and Ground Controlled Intercept radars to guide the fighters into the bombers.
And the German night fighters had their own on-board radar. In all the Germans had over 7,500 radars dedicated to tracking and killing the allied bombers.
Each allied bombing mission lost 2-20% of their planes. Bomber crews had to fly 25 missions to go home. The German objective was to make strategic bombing too costly for the Allies to continue.
By 1942 the Allied Air Command recognized they needed to reduce allied losses to fighters and flak. We needed a way to shut down the German Air Defense system. (Bear with me as this history takes you from the skies of Europe to Fred Terman.)
The Electronic Shield To shut it down we first needed to understand the German “Radar Order of Battle.” What radars did the Germans have and what were their technical characteristics? How effective they were? What weapons were they associated with? We needed to find out all this stuff and then we needed to figure out how to confuse it and make it ineffective.
So the U.S. set up a top secret, 800-person lab to do just that, first, to gather signals intelligence to understand the ”Radar Order of Battle” and then, to wage “electronic warfare” by building mechanical and electronic devices to severely hamper the Germans’ ability to target and aim their weapons.
Ferrets and Crows – Signals Intelligence The first job of the secret lab was to find and understand the German air defense system. So we invented the U.S. Signals Intelligence industry in about 12 months (with help from their British counterparts at the Telecommunications Research Establishment.) These mission of the planes called Ferrets, manned by crews called Crows, was to find and understand the German electronic air defense system. We stripped out B-24 bombers, took out all the bomb racks, took out all the bombs and even took out all the guns. And we filled it with racks of receivers and displays, wire and strip recorders and communications intercept equipment that could search the electromagnetic spectrum from 50 megahertz to 3 gigahertz, and this is 1943.
We flew these unarmed planes in and out of Germany alongside our bombers and basically built up the “radar order of battle.” We now understood where the German radars were, their technical details and what weapons they controlled.
Tin Foil Rain – Chaff We first decided to shut down the German radars that were directing the anti-aircraft guns and the fighter planes. And to do that we dropped tin foil on the Germans. No kidding. Radar engineers had observed if you cut a strip of aluminum foil to 1/2 the wavelength of a radar transmitter and throw it in front of the radars antenna, the radar signal would reflect perfectly. All the radar operator would see was noise, rather than airplanes.
Well, you couldn’t stand in front of the German radars and throw out tin foil, but you could if you had a fleet of airplanes. Each plane threw out packets of aluminum foil (called “chaff”.) The raid on Hamburg in July, 1943 was the first use of chaff in World War II. It completely shut down the German air defense system in and around Hamburg. The British and then the Americans firebombed the city with minimal air losses.
Chaff used 3/4′s of all the aluminum foil in the U.S. in World War II, because by the end of the war, every bomber stream was dumping chaff on every mission.
Jam It and Shut it Down - Electronic Warfare But this secret lab was focused on electronic warfare. So they systematically designed electronic devices called “jammers” to shut down each part of the German air defense system. Think of a “jammer” as a radio transmitter broadcasting noise on the same frequency of the enemy radar set. The goal is to overwhelm the enemy radar with noise so they couldn’t see the bombers. We built electronic jammers to target each part of the German air defense system: their early warning radars, the short range radars, the antiaircraft gun radars, the Ground Control Intercept Radars, the air to ground radio links and even the radars onboard the German night fighters. By the end of the war we had put multiple jammers on every one of our bombers, and while their power output was ridiculously low, these jammers were flying in formation with 1,000 other planes with their jammers on, and the combined power was enough to confuse the radar operators.
Just to give you a sense of scale of how big this electronic warfare effort was, we built over 30,000 jammers, with entire factories running 24/7 in the U.S. making nothing but jammers to put on our bombers.
By the end of World War II, over Europe, a bomber stream no longer consisted of just planes with bombs. Now the bombers were accompanied by electronics intelligence planes looking for new radar signals, escort bombers just full of jammers and others full of chaff, as well as P-51 fighter planes patrolling alongside our bomber stream.
Every WWII Movie and Book with a Bomber was Wrong While there were lots of stories about how the British early warning radar system, called “Chain Home” saved England during the Battle of Britain by giving the Spitfire pilots time to scramble to intercept German bombers, there wasn’t a coherent story about American and British bombers encountering the German radar-guided air defense system.
This lack of information meant that every World War II movie or book that had airplanes on bombing missions in it was wrong. Every one of them. (To someone who had grown up with reruns of WWII war movies on TV, this was a shock.) Every movie I had seen – 12 O’clock High, Memphis Belle, etc. – assumed that there were no electronics other than radios on these bombers. Wrong. Not only didn’t the movie makers know, but the pilots and crews didn’t know about the German radar guided system trying to kill them. Nor did they know about the electronic shield being assembled to try to protect them.
But while this may be a great story what the does this have to do with the history of Silicon Valley?
The answer lies with who ran this lab and became the father of electronic warfare and Signals Intelligence in the Cold War for the next 20 years.
Who Ran the Most Secret Lab You Never Heard of? It was Fred Terman of Stanford. The Harvard Radio Research Lab was his creation. A Stanford professor was at Harvard in World War II because the head of the Office of Scientific Research and Development thought Terman was the best radio engineer in the country. (Why couldn’t he have set up a lab at Stanford? Apparently, the Office of Scientific Research thought that Stanford’s engineering department was second rate.)
Finally, I had an answer to the question I had asked 35 years earlier when I was in Thailand: “How did electronic warfare get started?” Now I knew that it began in the early days of World War II as a crash program to reduce the losses of bombers to the German air defense network. Electronic warfare and signals intelligence in the U.S. started with Fred Terman and the Harvard Radio Research Lab.
Spooky Music Reading about Terman was like finding the missing link in my career. Here was the guy who invented the field I had spent the first five years of my adult life working on. And 30 years later I was teaching in a building named after him and never knew a thing about him. Play spooky music here.
I began to realize a few things: First, everything we had done in electronic warfare in the Vietnam War was just a slightly more modern version of what we had done over occupied Europe in World War II. (And in hindsight, we seemed a bit more agile and innovative in WWII.)
Unbelievably, in less than two years, Terman’s Radio Research lab invented an industry and had turned out a flurry of new electronic devices the likes of which had never been seen. Yet decades later the military lacked the agility to write a spec in two years, let alone get 10′s of thousands of new systems deployed on aircraft as Terman had done. How was this possible? In 21st century terminology we’d say that Terman built the Radio Research lab into a customer-centric organization doing agile development.
Just the Beginning The public history of Terman’s involvement with the military ends when he returns back to Stanford at the end of the war. Nothing in his biography or any Stanford history mentions anything as exciting as his work in World War II. The public story of his last 20 years at Stanford, in the 1950′s and ’60′s, seems to have him settle into the role of the kindly dean and innovative provost.
At SuperMac, I thought I was good VP of marketing; aggressive, relentless and would take no prisoners – even with my peers inside the company. But a series of Zen-like moments helped me move to a different level that changed how I operated. It didn’t make my marketing skills any worse or better, but moved me to play forever on a different field.
Zen moment #1- Admitting a mistake and asking for help
Up until this point in my career I had one response anytime I screwed something up: blame someone else. The only variable was how big the screw-up was – that made a difference in whom I blamed. If it was a very big mistake, I blamed the VP of Sales. “This marketing campaign didn’t work? It was a brilliant strategy but Sales screwed it up.” (My own lame defense here for this behavior is that sales and marketing are always cats and dogs in startups. Historically, these were two guys with high testosterone. They hit each other with baseball bats until one of them dropped.)
This first Zen moment happened at a SuperMac exec staff meeting. I was asked to explain why a marketing program that cost $150,000 bucks literally generated nothing in revenue for the company. I still remember that I was gearing up to go into my ‘I’m going to blame the sales guy’ routine. Since our sales guy was a good street fighter, I knew the ensuing melee would create enough of a distraction that no one would talk about my marketing debacle. My brain had queued up the standard, “It’s all Sales’s fault,” but instead, what came out of my mouth was, “You know, I really screwed this marketing campaign up, making it successful is important for the company, and I need all your help to fix it.” You could have heard a pin drop. It was so out of character, people were shocked. Some stammered out, “can you say that again?”
Our president picked up on the momentum and asked me what I needed from the rest of the exec team to fix this debacle. I replied: “This is really important for our success as company and I’m really at a loss why customers didn’t respond the way we expected. Anybody else got some other ideas?”
From there, the conversation took a different trajectory. It was uncomfortable for some people, because it was new ground – I was asking for help – wanting to do what was right for the company.
It was definitely a “Zen moment” for me in terms of my career. From then on when I screwed up, not only did I own up to it, I asked for help. This behavior had an unintended consequence I couldn’t have predicted: when others started volunteering to help me solve a problem, finding a solution became their goal as well.
Soon one or two others execs tested the waters by making a small tentative “ask” as well. When they discovered that the sky didn’t fall and they still had their jobs, our corporate culture took one more step toward a more effective and cohesive company.
I was visiting a friend whose company teaches executives how to communicate effectively. He had just filmed the second of a series of videos called, Speaking to the Big Dogs: How mid-level managers can communicate effectively with C-level executives (CEO, VP’s, General Managers, etc.) As we were plotting marketing strategy, I mentioned that the phrase “Speaking to the Big Dogs” might end up as his corporate brand. And that he might want to think about aligning all his video and Internet products under that name.
We were happily brainstorming when one of his managers spoke up and said, “Well, the phrase ‘Big Dogs’ might not work because it might not translate well in our Mexican and Spanish markets.” Hmm, that’s a fair comment, I thought, surprised they even had international locations. “How big are your Mexican and Spanish markets,” I asked? “Well, we’re not in those markets today… but we might be some day.” I took a deep breath and asked, “Ok, if you were, what percentage of your sales do you think these markets would be in 5 years?” “I guess less than 5%,” was the answer.
Now I mention this conversation not because the objection was dumb, but because objections like these happen all the time when you’re brainstorming. And when you are brainstorming you really do want to hear all ideas and all possible pitfalls. But entrepreneurial leaders sometimes forget that in startups, you can’t allow a “corner case” to derail fearless decision making.
Corner Cases A corner case is an objection that may be:
technically reasonable
may have a probability of occurring
its probability of occurring is lower than your probability of running out of money.
I’ve noticed that corner case comments are directly proportional to the intelligence of the people in the room. The smarter the team the more objections you’ll have – and they’ll all be technically and theoretically possible.
Corner Cases and Consensus are For Large Companies Carefully considering each and every possible outcome before you proceed with a decision is something large companies with large revenues, shareholders and employees need to do.
Achieving consensus about every corner case from each stakeholder in the room is something large companies with large revenues, shareholders and employees need to do.
Unlike large corporations, startup meetings are not about achieving consensus for every objection raised. They are about forward motion, momentum and feedback loops (i.e. Customer Development.)
Calculate the Odds The heuristic I suggest is: hear the corner case objections, make the objector calculate the odds, if the potential damage estimate is low (probability of the event occurring multiplied by its ability to put you out of business) keep the meeting focussed and move on. If you do this consistently your team will catch on.
You’ll be spending your time on what matters, rather what’s theoretically possible. For a startup “No Corner Cases” needs to be an integral part of your corporate DNA.
Any startup that’s striving for consensus on corner cases instead of speed and tempo will be out of business.
When the legend becomes fact, print the legend. - The Man Who Shot Liberty Valance
I always had been curious about how Silicon Valley, a place I had lived and worked in, came to be. And throughout my career as an entrepreneur I kept asking questions of my VC investors and friends; Where did entrepreneurship come from? How did Silicon Valley start? Why here? Why now? How did this culture of “make it happen” emerge, etc. And the answer came back much as it did in my past jobs; Who cares, get back to work.
After I retired, Jerry Engel, director of the Lester Center on Entrepreneurship, at U.C. Berkeley Haas Business School was courageous enough to give me a forum teach the Customer Development Methodology. As I was researching my class text, I thought it would be simple enough to read up on a few histories of the valley and finally get my questions about the genesis of entrepreneurship answered.
The Legend: HP, Intel and Apple I read all the popular books about the valley and they all told a variant of the same story; entrepreneurs as heroes building the Semiconductor and Personal Computer companies: Bill Hewlett and David Packard at HP, Bob Taylor and the team at Xerox PARC, Steve Jobs and Wozniak at Apple, Gordon Moore and Bob Noyce at Intel, etc. These were inspiring stories, but I realized that, no surprise, the popular press were writing books that had mass appeal. They were all fun reads about plucky entrepreneurs who start from nothing and against all odds, build a successful company.
But no one was writing about where the entrepreneurial culture had come from. Where were the books explaining why were all these chip and computer companies started here? Why not elsewhere in the country or the world? With the exception of one great book, no one was writing about our regional advantage. Was it because entrepreneurs keep moving forward and rarely look back? I needed to dig deeper.
The Facts: Vacuum Tube Valley – Our 100th Anniversary To my surprise, I discovered that yes, Silicon Valley did start in a garage in Palo Alto, but it didn’t start in the Hewlett Packard garage. The first electronics company in Silicon Valley was Federal Telegraph, a tube company started in 1909 in Palo Alto as Poulsen Wireless. (This October is the 100th anniversary of Silicon Valley, unnoticed and unmentioned by anyone.) By 1912, Lee Deforest working at Federal Telegraph would invent the Triode, (a tube amplifier) and would go on to become the Steve Jobs of his day – visionary, charismatic and controversial.
* Federal Telegraph and Lee Deforest in Palo Alto are the first major events in what would become Silicon Valley. We need to reset our Silicon Valley birthday calendars to here.
By 1937, when Bill Hewlett and David Packard left Stanford to start HP, the agricultural fields outside of Stanford had already become “Vacuum Tube Valley.” HP was a supplier of electronic test equipment and joined a small but thriving valley electronics industry with companies like Litton and Eitel and McCollough.
* By the late 1930′s when HP started, a small group (measured in hundreds) of engineers who made radio tubes were building the valleys’ ecosystem for electronics manufacturing, product engineering and technology management.
Who would have known?
Microwave Valley – the 1950′s and ’60′s There isn’t much written about Silicon Valley during and after World War II. The story of the valley post war, through the 1950′s, is mostly about the growth of the tube companies and the rise of Hewlett Packard. The popular literature has the valley springing to life in the 1960′s with the semiconductor revolution started by Shockley, Fairchild, Signetics, National and Intel, followed by the emergence of the personal computer in the mid 1970′s.
But the more I read, the more I realized that the public history’s of the valley in the 1950′s and ’60′s were incomplete and just plain wrong. The truth was that huge dollars were spent on a large number of companies that never made the press or into the history books. Companies specializing in components and systems that operated in the microwave portion of the electromagnetic spectrum sprouted faster than fruit trees in the valley orchards. In ten years, from the early 1950′s to the early 1960′s, the valley went through a hiring frenzy as jobs in microwave companies went from 700 to 7,000.
This wave of 1950′s/’60′s startups (Watkins-Johnson, Varian, Huggins Labs, MEC, Stewart Engineering, etc.) were making dizzying array of new microwave components; power grid tubes, klystrons, magnetrons, backward wave oscillators, traveling wave tubes (TWT’s), cross-field amplifiers, gyrotrons, and on, on… And literally across the valley, these microwave devices were being built into complete systems for the U.S. military by other new startups; Sylvania Electronics Defense Laboratory, Granger Associates, Philco, Dalmo Victor, ESL and Argosystems. In the 1950′s and ’60′s more money was pouring into these companies than on the fledgling chip and computer companies.
* The 10x expansion in the number of engineers in the valley in the 1950′s came from the military and microwaves – before the semiconductor boom. And these microwave engineers were working at startups – not large companies. You never heard of them because their work was secret.
When I read the funny names of these microwaves devices… Backward wave oscillators, TWT’s, Magnetrons…long silent memories came back. These components were the heart of the electronic warfare equipment I have worked on; including fighters in Thailand and on B-52 bombers. After 20 years, the story started coming home for me.
The Revolution Wasn’t Televised What the heck happened here to create this burst of innovation? What created this microwave startup culture in the 1950′s? And since there was no Venture Capital in the 1950′s/’60′s where was the money coming from? This startup boom seemed to come out of nowhere. Why was it occurring here? And why on earth the sudden military interest in microwaves?
Part of the answer was that these companies and the military had forged some type of relationship. And it appeared that Stanford University’s engineering department was in middle of all this. The formation of the military/industrial/university relationships during the Cold War and the relationship between Stanford and the intelligence community in particular, went on untold and out of sight.
While nothing I read described the specific products being worked on, or what specifically was Stanford’s contribution, there were some really tantalizing pointers to who the real customers were (hint, it wasn’t just the “military,”) or why was this work was being done at Stanford.
No one knew that it all pointed to just one guy at the center of it all - Fred Terman of Stanford University.
* Stanford, the military and our intelligence agencies started the wave of entrepreneurial culture that today’s Silicon Valley takes for granted.
The “Secret Life of Fred Terman” and “Stanford Fights the Cold War” on the next “Secret History” posts.
A year after we started repositioning the company, Engineering, which had been working on a family of new products literally for years, came to deliver some good news and bad news.
First the bad news: the new family of eight high performance graphics cards we were counting on couldn’t be delivered. The plug-in co-processor architecture was too complex and couldn’t be made to work reliably. Instead of the family of eight products we were expecting, only one could be delivered. Nothing else was in the development pipeline for the next 12 months.
I couldn’t believe what I was hearing. One of the reasons I had joined the company was seeing these boards as hope for the future. Now we were faced with the fact that even though we were gaining market share daily, there was nothing coming out of Engineering.
Well not quite nothing: there was the good news. Instead of eight boards, Engineering was going to be able to deliver one new graphics board. Just one. But it was going to be the fastest graphics board ever made. In fact, according to our Potrero benchmark suite this new board ran our customer applications ten times faster than our current products.
I went home to think about this. Instead of a product family, we had a single point product. Each of my competitors each had 5-10 graphics boards covering a range of prices with performance to match. Even our current product line had four graphics boards in it. Now our new product line would only have one board?!. What could we do?
Marketing Gets into the Engineering Business
The next day I walked in uninvited to the VP of Engineering’s office and asked if he had a minute. I said, “I realize you’re trying to get the one board out to market, but I have a question – can you slow our new board down?” It doesn’t take much imagination to see the look he gave me when I asked that question. “Steve, this hasn’t been a good week. What do you really want?” I felt sorry for him, he was working really hard to dig out of this mess. I replied, “No joke. Can you make it slower? I think he wanted to strangle me as he barely got out, “We worked for years to deliver a product that’s ten times faster than anything that exists and you want to make it slower?” Well, not exactly, “What I want to know is if the board would work if you slowed it down by 10%?” Yes, was the answer. “How about if you slowed it down 20%?” Yes, was still the answer. “By 30%?” The change in his demeanor – from trying to kill me – to laughing, as it dawned on him where I was going, could only be described as hysterical relief. “40%?” Yes, yes and yes.
We were about to be partners in building a new product family.
Rabbits Out of the Hat – Branding and Line Extensions First, what we proposed is that we take our world class, ten-times-faster-than-anyone board and build an entire product family around it, by slowing it down. We wanted nine boards, each differing in performance by 10%. The only real difference between them would be the addition of “wait states” or “slow down” instructions on a chip. Our entire new product family would be an identical board.
Next, we were going to create three separate product families, each its own unique brand. And within each brand we would have a “good”, “better”, and “best” graphic board. All tailored to our color publishing market.
Finally, these product families would be priced to bracket (box in) everyone of our competitors’ products with better price and performance. We were going to price the products from $699 to $3,999. Our calculations had us losing money on the two lowest cost boards, breaking even on the third and making great margins on the other six. We calculated our blended gross margin for the company by estimating the number of units we would sell of each board times the gross margin of each individual board (then I crossed my fingers and prayed we were right.)
In essence we were proposing that we ship the same board in 9 different colored boxes and charge from $699 to $3,999 depending on the color of the box and the speed of the board. (This turned out to give our customers immense value. We would have charged $3,999 for the high-end board. Now we could give customers lower price boards without Engineering spending 12 months to design new ones.)
You’re Going to Do What?! The reaction inside our company could not be described as polite. At first most people thought we were joking. No one believed it would work. Some engineers were insulted that we were going to slow down their board and sales was convinced that within days of the board hitting the street we would have a black market in chips to speed up the $699 boards and turn them into $3,999 ones. My own marketing department was convinced that the same industry magazines, which we had managed so well, would turn on us when they saw that the boards were physically identical.
Yet I believed that this was the only alternative to slowly going out of business. (While our engineering department was close to the customer, seven of those eight products they were going to ship to those customers weren’t going to see the light of day.) Now it was up to Marketing is to take the technology as delivered by Engineering and shape it to the needs of the customers and market. By creating these new families of products we could provide real value to our color desktop publishing customers by giving them performance at a price they couldn’t get anywhere else.
A Big Idea - Marketing Adds Value. This notion of Marketing taking what Engineering builds as a starting point, not an end point, is the difference between just being a marcom department and a value-added Marketing department. If all you’re doing is shipping and launching the product as spec’d by Engineering, you’re not adding value. The job of Marketing is to help Engineering figure out how to deliver product(s) that customers need and want. It starts with a deep understanding of what customers need (and making sure Engineering is getting continuous customer feedback and interaction.) We did that when we surveyed our customers. Next, we had a good understanding of the capabilities of the product that Engineering was building. And in this very unique case, we figured out how to maximize revenue and profit by branding and product line extensions.
We would use this same idea 10 years later at E.piphany.
SuperMac product line – built on a single graphics card
Relentless Execution If we were right, this line extension and branding strategy would allow us to catch up to our competitors and overtake them.
Luckily marketing had built a reservoir of credibility with our peers and CEO. After the VP of Engineering described the alternatives (no new products for a year), desperation became the mother of innovation and we launched our new family of nine new graphics boards. As far as manufacturing was concerned, they were the identical graphics board. As customers saw them, they were a new family of products aimed directly at the color desktop publishing market with astonishing performance and a low-cost entry price.
The results spoke for themselves: Not one black-market board ever appeared, and the press was satisfied with our “customer value and product family” explanation. Our new graphics boards became the market leader of the industry. In three and a half years SuperMac’s market share went from 11% to 68%, as we went from bankruptcy to $150 million in sales.
Years later, I was having coffee with the VP of Sales and Marketing from one our competitors and he said, “We would have beat you guys, but we just couldn’t keep up with the tidal wave of products coming from your engineering department. They came up with exactly the right products at the right price.” I took a long sip of coffee as I thought of all the things I could say. Instead I smiled, nodded and said, “Yep, it was amazing, they just kept pulling rabbits out of the hat.”
What did I learn so far?
At times, what Engineering delivers is the raw material.
Marketings job is to take engineering products and use them to maximize revenue and profit.
In an existing or resegmented market, this may include branding and product line extensions.
This requires deep customer and competitive knowledge.
In most markets, “first mover advantage” is illusorily; fast followers often win.
This article in the NY Times about China’s thinking strategically about electric cars was a poignant contrast to our struggles in the U.S. with the auto bailout. It reminded me about the adage, “when you’re up to your neck in alligators, the last thing you remember is that you were supposed to drain the swamp.” Memo to Washington – weren’t we were to be the country innovating here?
Normally I’ll keep my posts to subjects on which I have domain expertise. However:
The clock is ticking on General Motors
The auto industry is desperate for some new thinking and reinvention as a 21st century enterprise
The administration has the opportunity to think like entrepreneurs not just bankers – by creating something new, innovative and valuable
An industry gasping for its last breath is least likely to continue to invest in new products that won’t pay the bills for another decade (regardless of whether its in the national interest.)
I’ve shared this with Obama’s Energy and EPA team
The auto industry bailout ought to have four goals (you can put them in your own order.)
Jobs
Keeping an Auto Industry as a strategic national resource
Energy Independence
Clean Energy
I proposed that in exchange for the GM bailout we spin out the Chevy Volt into an open source electric car platform.
Any automaker who builds the car in the U.S. will be able to build on the Volt Platform, but all drivetrain improvements are open source.
The first 10,000 units would be royalty free. After that, other automakers would pay GM some per/car royalty.
Since it’s in the government’s interest to facilitate goals 1-4, they will subsidize the cost of the initial units so that they are affordable. Economies of scale will drop component costs (read batteries) over time.
(I will admit that taking a concept such as “open source” from the software business and applying it to the auto industry and Washington D.C. was somewhat incomprehensible at first to the Energy and EPA team. But they’re smart, let’s see what happens.)
The reality is that independent electric vehicle startups will win over time (closer to the customer, more agile, etc.) over a national platform. As part of this spin out I’d make sure the Government also supports the nascent U.S. electric car industry and ensures it gets its share of the bailout largesse. But the two together will kick start a new industry and save a dying one.
As I said, I am far from an expert in the auto industry, government bailouts or other related big “businesses”. But I think it’s time we take the out-of-the-box thinking that created new businesses in high tech – the concept of open source, for instance − and apply it in creative and powerful ways to reinvent floundering, older industries.
If anyone has a better idea, I would love to see it here.
It was 1978. Here I was, a very junior employee of ESL, a company with its hands in the heart of our Cold War strategy. Clueless about the chess game being played in Washington, I was just a minion in a corporate halfway house in between my military career and entrepreneurship.
ESL sent me overseas to a secret site run by one of the company’s “customers.” It was so secret the entire site was could have qualified as one of Dick Cheney’s “undisclosed locations.” As a going away gift my roommates got me a joke disguise kit with a fake nose, glasses and mustache.
The ESL equipment were racks of the latest semiconductors designed into a system so complicated that the mean-time-between-failure was measured in days. Before leaving California, the engineers gave me a course in this specialized receiver design. Since I had spent the last four years working on advanced Air Force electronic intelligence receivers, I thought there wouldn’t be anything new. The reality was pretty humbling. Here was a real-world example of the Cold War “offset strategy.” Taking concepts that had been only abstract Ph.D theses, ESL had built receivers so sensitive they seemed like science fiction. For the first time we were able to process analog signals (think radio waves) and manipulate them in the digital domain. We were combining Stanford Engineering theory with ESL design engineers and implementing it with chips so new we were debugging the silicon as we were debugging the entire system. And we were using thousands of chips in a configuration no rational commercial customer could imagine or afford. The concepts were so radically different that I spent weeks dreaming about the system theory and waking up with headaches. Nothing I would work on in the next 30 years was as bleeding edge.
Now half a world away on the customer site, my very small role was to keep our equipment running and train the “customer.” As complex as it was, our subsystem was only maybe one-twentieth of what was contained in that entire site. Since this was a location that worked 24/7, I was on the night shift (my favorite time of the day.) Because I could get through what I needed to do quickly, there wasn’t much else to do except to read. As the sun came up, I’d step out of the chilled buildings and go for an early morning run outside the perimeter fence to beat the desert heat. As I ran, if I looked at the base behind the fence I was staring at the most advanced technology of the 20th century. Yet if turned my head the other way, I’d stare out at a landscape that was untouched by humans. I was in between the two thinking of this movie scene. (At the end of a run I used to lay out and relax on the rocks to rest – at least I did, until the guards asked if I knew that there were more poisonous things per square foot here than anywhere in the world.)
Before long I realized that down the hall sat all the manuals for all the equipment at the entire site. Twenty times more technical reading than just my equipment. Although all the manuals were in safes, the whole site was so secure that anybody who had access to that site had access to everything – including other compartmentalized systems that had nothing to do with me – and that I wasn’t cleared for. Back home at ESL control of compartmentalized documents were incredibly strict. As a contractor handling the “customer’s” information, ESL went by the book with librarians inside the vaults and had strict document access and control procedures. In contrast, this site belonged to the “customer.” They set their own rules about how documents were handled, and the safes were open to everyone.
I was now inside the firewall with access to everything. It never dawned on me that this might not be a good idea.
Starting on the safe on the left side, moving to the safe on the right side, I planned to read my way through every technical manual of every customer system. We’re talking about a row of 20 or so safes each with five drawers, and each drawer full of manuals. Because I kept finding interesting connections and new facts, I kept notes, and since the whole place was classified, I thought, “Oh, I’ll keep the notes in one of these safes.” So I started a notebook, dutifully putting the classification on the top and bottom of each page. As I ran into more systems I added the additional code words that on the classification headers. Soon each page of my notes had a header and footer that read something like this: Top Secret / codeword/ codeword / codeword / codeword / codeword / codeword / codeword.
I was in one of the most isolated places on earth yet here I was wired into everywhere on earth. Coming to work I would walk down the very long, silent, empty corridors, open a non-descript door and enter the operations floor (which looked like a miniature NASA Mission Control), plug a headset into the networked audio that connected all the console operators — and hear the Rolling Stones “Sympathy for the Devil.” (With no apparent irony.) But when the targets lit up, the music and chatter would stop, and the communications would get very professional.
Nine months into my year tour, and seven months into my reading program, I was learning something interesting every day. (We could do what!? From where??) Then one day I got a call from the head of security to say, “Hey, Steve can you stop into my office when you get a chance?”
Are These Yours?
Now this was a small site, about 100-200 people, and here was the head of security was asking me over for coffee. Why how nice, I thought, he just wants to get to know me better. (Duh.) When I got to his office, we made some small talk and then he opened up a small envelope, tapped it on a white sheet of paper, and low and behold, three or four long black curly hairs fall out. “Are these yours?” he asked me.
This the one of the very few times I’ve been, really, really impressed. I said, “Why yes they are, where did you get them?” He replied, ‘They were found in the ‘name of system I should have absolutely no knowledge or access to’ manuals. Were you reading those?” I said, “Absolutely.” When he asked me, “Were you reading anything else?” I explained, “Well I started on the safe on the left, and have been reading my way through and I’m about three quarters of the way done.”
Now it was his turn to be surprised. He just stared at me for awhile. “Why on earth are you doing that?” he said in a real quiet voice. I blurted out, “Oh, it’s really interesting, I never knew all this stuff and I’ve been making all these notes, and …” I never quite understood the word “startled” before this moment. He did a double-take out of the movies and interrupted me, “You’ve been making notes?” I said, “Yeah, it’s like a puzzle,” I explained. ”I found out all this great stuff and kept notes and stored in the safe on the bottom right under all the…” And he literally ran out of the office to the safes and got my notebook and started reading it in front of me.
And the joke (now) was that even though this was the secret, secret, secret, secret site, the document I had created was more secret than the site.
While the manuals described technical equipment, I was reading about all the equipment and making connections and seeing patterns across 20 systems. And when I wasn’t reading, I was also teaching operations which gave me a pretty good understanding of what we were looking for on the other side. At times we got the end product reports from the “customer” back at the site, and these allowed me to understand how our system was cued by other sensors collecting other parts of the electromagnetic spectrum, and to start looking for them, then figuring out what their capabilities were.
Pattern Recognition
As I acquired a new piece of data, it would light up a new set of my neurons, and I would correlate it, write it down and go back through reams of manuals remembering that there was a mention elsewhere of something connected. By the time the security chief and I were having our ‘curly hairs in the envelope’ conversation, not only did I know what every single part of our site did, but what scared the security guy is that I had also put together a pretty good guesstimate of what other systems we had in place worldwide.
For one small moment in time, I may have assembled a picture of the sum of the state of U.S. signals intelligence in 1978 − the breadth and depth of the integrated system of technical assets we had in space, air, land, and other places all focused on collection. (If you’re a techie, you’d be blown away even 30 years later.) And the document that the head of security had in his hand and was reading, as he told me later, he wasn’t cleared to read – and I wasn’t cleared to write or see. I’m sure I knew just a very small fraction of what was going on, but still it was much more than I was cleared for.
At the time this seemed quite funny to me probably because I was completely clueless about what I had done, and thought that no one could believe there was another intent. But in hindsight, rather than the career I did have, I could now just be getting out of federal prison. It still sends shivers up my back. After what I assume were a few phone calls back to Washington, the rules said they couldn’t destroy my notebook, but they couldn’t keep it at the site either. Instead my notebook was couriered to Washington – back to the “customer.” (I picture it still sitting in some secure warehouse.) The head of security and I agreed my library hours were over and I would take up another hobby until I went home.
Thank you to the security people who could tell the difference between an idiot and a spy.
When I got back to Sunnyvale, my biggest surprise was that I didn’t get into trouble. Instead someone realized that the knowledge I had accumulated could provide the big picture to brief new guys “read in” to this compartmentalized program. Of course I had to work with the customer to scrub the information to get its classification back down to our compartmental clearance. (My officemate who would replace me on the site, Richard Farley, would go on to a more tragic career.) I continued to give these briefings as a consultant to ESL even after I had joined my first chip startup; Zilog.
Two Roads Diverged in a Wood and I took the Road Less Traveled By, And That Has Made All the Difference
Extraordinary times bring extraordinary people to the front. Bill Perry the founder of ESL, is now acknowledged as one of the founders of the entire field of National Reconnaissance, working the NSA and the CIA in programs to intercept and evaluate Soviet missile telemetry and communications intelligence.
ESL had no marketing people. It had no PR agency. It shunned publicity. It was the model for almost every military startup that followed, and its alumni who lived through its engineering and customer-centric culture had a profound effect on the rest of the valley, the intelligence community and the country. And during the Cold War it sat side by side with commercial firms in Silicon Valley, with its nondescript sign on the front lawn. It had Hidden in Plain Sight.
As for me, after a few years I decided that into was time to turn swords into plowshares. I left ESL and the black world for a career in startups; semiconductors, supercomputers, consumer electronics, video games and enterprise software.
I never looked back.
It would be decades before I understood what an extraordinary company I had worked for.
Thank you Bill Perry for one hell of a start in Silicon Valley.
I was 24.
My first class of students at ESL: Guardrail V Training Class (note the long black curly hairs)
”If things seem under control, you are just not going fast enough.”
- Mario Andretti
I was catching up over breakfast with a friend who’s now CEO of his own startup. One of the things he mentioned was that when it came to decision-making he still tended to think and act like an engineer. Each and every decision he made was carefully thought through and weighed. And he recognized it was making his startup feel and act like a big ponderous company.
Speed = Execution Now
General George Patton said, “A good plan violently executed now is better than a perfect plan next week.” The same is true in your company. Most decisions in a startup must be made in the face of uncertainty. Since every situation is unique, there is no perfect solution to any engineering, customer or competitor problem, and you shouldn’t agonize over trying to find one. This doesn’t mean gambling the company’s fortunes on a whim. It means adopting plans with an acceptable degree of risk, and doing it quickly. (Make sure these are fact-based, not faith-based decisions.) In general, the company that consistently makes and implements decisions rapidly gains a tremendous, often decisive, competitive advantage.
Decision Making Heuristics for the Startup CEO
The heuristic I gave my friend was to think of decisions of having two states: those that are reversible and those that are irreversible. An example of a reversible decision could be adding a product feature, a new algorithm in the code, targeting a specific set of customers, etc. If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.
My advice was to start a policy of making reversible decisions before anyone left his office or before a meeting ended. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.
Once you learn how to make decisions quickly you’re not done. Startups that are agile have mastered one other trick – and that’s Tempo – the ability to make quick decisions consistently over extended periods of time. Not just for the CEO or the exec staff, but for the entire company. For a startup Speed and Tempo need to be an integral part of your corporate DNA.
Great startups have a tempo of 10x a large company.
If you don’t know where you’re going, how will you know when you get there?
At the same time we were educating the press, we began to educate our own marketing department about what exactly we were supposed to be doing inside the company. During the first few weeks I asked each of my department heads what they did for marketing and the company. When I asked our trade show manager she looked at me like I was the house idiot and said, “Steve, don’t you know that my job is to set up our trade show booth?” The other departments in marketing gave the same answers; the product-marketing department said their job was to write data sheets. But my favorite was when the public relations manager said, “we’re here to write press releases and answer the phone in case the press calls.”
If these sound like reasonable answers to you, and you are in a startup/small company, update your resume.
Titles are not your job
When I pressed my staff to explain why marketing did trade shows, or wrote press releases or penned data sheets, the best I could get was “why that’s our job.” It dawned on me that we had a department full of people who were confusing their titles with what contribution they were supposed to be making to the company. While their titles might be what their business cards said, titles were not their job – at least in any marketing department I was running.
Titles are not the same as what your job is. This is a big idea.
Department Mission Statements – What am I Supposed to Do Today
It wasn’t that we somehow had inherited dumb employees. What I was actually hearing was a failure of management. No one had sat the marketing department down and defined what our department Mission (with a capital “M”) was.
Most startups put together a corporate mission statement because the CEO remembered seeing one at their last job, or the investors said they needed one. Most companies spend an inordinate amount of time crafting a finely honed corporate mission statement for external consumption and then do nothing internally to actually make it happen. (And to this day I can’t remember if we even had a corporate mission statement.) What I’m about to describe here is quite different.
What was missing in SuperMac marketing was anything in writing that gave the marketing staff daily guidance on what they should be doing. The first reaction from my CEO was, “that’s why you’re running the department.” And yes, we could have built a top-down, command-and-control hierarchy. But what I wanted was an agile marketing team capable of operating independently without day-to-day direction.
So what we needed to do was to craft a Departmental Mission statement that told everyone why they come to work, what they need to do, and how they will know they have succeeded. And it was going to mention the two words that SuperMac marketing needed to live and breathe: revenue and profit.
Five Easy Pieces – The Marketing Mission
After a few months of talking to customers, talking to our channel and working with sales we defined the marketing Mission (our job) was to: Help Sales deliver $25 million in sales with a 45% gross margin. To do that we will create end-user demand and drive it into the sales channel, educate the channel and customers about why our products are superior, and help Engineering understand customer needs and desires. We will accomplish this through demand-creation activities (advertising, PR, tradeshows, seminars, web sites, etc.), competitive analyses, channel and customer collateral (white papers, data sheets, product reviews), customer surveys, and market requirements documents.
This year, marketing need to provide sales with 40,000 active and accepted leads, company and product name recognition over 65% in our target market, and five positive product reviews per quarter. We will reach 35% market share in year one of sales with a headcount of twenty people, spending less than $4,000,000.
Generate end user demand (to match our revenue goals)
Drive that demand into our sales channels
Value price our products to achieve our revenue and margin goals (create high-value)
Educate our sales channel(s)
Help engineering understand customer needs
That was it. Two paragraphs, Five bullets. It didn’t take more.
Working to the Mission
Having the mission in place meant that our marketing team could see that what mattered was not what their business card said, but how much closer did their work move our department to completing the mission. Period.
It wasn’t an easy concept for everyone to understand.
Building the Team
My new Director of Marketing Communications turned the Marcom departments into a mission-focused organization. Her new tradeshow manager quickly came to understand that their job was not to set up booths. We hired union laborers to do that. A trade show was where our company went to create awareness and/or leads. And if you ran the tradeshow department you owned the responsibility of awareness and leads. The booth was incidental. I couldn’t care less if we had a booth or not if we could generate the same amount of leads and awareness by skydiving naked into a coffee cup.
The same was true for PR. My new head of Public Relations quickly learned that my admin could answer calls from the press. The job of Public Relations at SuperMac wasn’t a passive “write a press release and wait for something to happen activity.” It wasn’t measured by how busy you were, it was measured by results. And the results weren’t the traditional PR metrics of number of articles or inches of ink. I couldn’t care less about those. I wanted our PR department to get close and personal with the press and use it to generate end user demand and then drive that demand into our sales channel. (The Potrero benchmark strategy was one component of this creating end user demand through PR.) We were constantly creating metrics to see the effects of different PR messages, channels and audiences on end-user purchases.
The same was true for the Product Marketing group. I hired a Director of Product Marketing who in his last company had ran its marketing and then went out into the field and became its national sales director. He got the job when I asked him how much of his own marketing material his sales team actually used in the field. When he said, “about ten percent,” I knew by the embarrassed look on his face I had found the right guy. And our Director of Technical Marketing was superb at understanding customer needs and communicating them to engineering.
Teaching Mission Intent – What’s Really Important
With a great team in place, the next step was recognizing that our Mission statement might change on the fly. “Hey, we just all bought into this Mission idea and now you’re telling us it can change?!”
We introduced the notion of Mission intent. What is the company goal behind the mission. In our case it was to sell $25 million in graphics boards with 45% gross margin. The idea of intention is that if employees understand the thinking behind the mission, they can work collaboratively to achieve it.
But we recognized that there would be time marketing would screw up, making the mission obsolete (i.e. we might fail to deliver 40,000 leads.) Think of intention as the answer to the adage, “When you are up to your neck in alligators it’s hard to remember you were supposed to drain the swamp.” For example; our mission said that the reason why marketing needed to deliver 40,000 leads and 35% market share, etc, was so that the company could sell $25 million in graphics boards at 45% gross margin.
What we taught everyone is that the intention is more enduring then the mission. (“Let’s see, the company is trying to sell $25 million in graphics boards with 45% gross margin. If marketing can’t deliver the 40,000 leads what else can we do for sales to still achieve our revenue and profitability?”) The mission was our goal, but based on circumstances it may change, but the Intent was immovable.
When faced with the time pressures of a startup, too many demands and too few people, we began to teach our staff to refer back to the five Mission goals and the Intent of the department. When stuff started piling up on their desks, they learned to ask themselves, “Is what I’m working on furthering these goals? If so, which one? If not, why am I doing it?”
They understood the mission intent was our corporate revenue and profit goals.
Core Values
Even after we had Mission and Intent down pat, one of the things that still drove me crazy was when we failed to deliver a project for sales on time or we missed a media deadline, everyone in my department had an excuse. (Since a large part of marketing was as a service organization to sales, our inability to deliver on time meant we weren’t holding up our end of the mission.) I realized that this was a broken part of our culture, but couldn’t figure out why. And one day it hit me that when deadlines slipped there were no consequences.
And with no consequences we acted as if schedules and commitments really didn’t matter. I heard a constant refrain of, “The channel sales brochure was late because the vendor got busy and they couldn’t meet the original deadline.” Or, “the January ad had to be moved into February because my graphic artist was sick but I didn’t tell you assuming it was OK.” Or, “we’re going to slip our product launch because the team thought they couldn’t get ready in time.” We had a culture that had no accountability, and no consequences - instead there were simply shrugged shoulders and a litany of excuses.
This had to change. I wanted a department that could be counted on delivering. One day I simply put up a sign on my door that said, “No excuses accepted.” And I let the department know what I meant was we were all going to be “accountable.”
What I didn’t mean was “deliver or else.” By accountable I meant, “we agreed on a delivery date, and between now and the delivery date it’s OK if you ask for help because you’re stuck, or something happened outside of your control. But do not walk into my office the day something was due and give me an excuse. It will cost you your job.” That kind of accountable.
And, “since I won’t accept those kind of excuses, you are no longer authorized to accept them from your staff or vendors either.” The goal wasn’t inflexible dates and deadlines, it was no surprises and collective problem solving. After that, we spent a lot more time working together to solve problems and remove obstacles in getting things done on-time.
Over time, accountability, execution, honesty and integrity became the cornerstones of our communication with each other, other departments and vendors.
We wouldn’t give excuses for failures, just facts and requests for help
We wouldn’t accept excuses for failures, just facts, and offer help
Relentless execution
Individual honesty and integrity
That was it. Four bullets. It defined our culture.
Why Do It
By the end of the first year our team had jelled. It was a department willing to exercise initiative, had the judgment to act wisely, and an eagerness to accept responsibility.
I remember at the end of a hard week my direct reports came into my office just to talk about the weeks little victories. And there was a moment as they shared their stories, that they all began to realize that our company (one that had just come off of life support) was beginning to kick the rear of our better-funded and bigger competitors.
We all marveled in the moment.
What did I learn so far?
Push independent execution of tasks down to the lowest possible level
Give everyone a shared Mission Statement: why they come to work, what they need to do, and how they will know they have succeeded.
Share Mission Intent for the big picture for the Mission Statement
Build a team comfortable with independent Mission execution
I saw an article in the New York Times about Google’s hiring practices that reminded me of the differences between great big successful technology companies and small scrappy startups.
I love Google.I think its one of the smartest companies out there. And it hires very smart people from the best schools. And if you meet their criteria of a “good student”, you ought to go to work there.Or Microsoft or IBM.
Nothing makes me happier then to see my students getting great grades (and as they can tell you I make them very work hard for them.)
But what I remind them is that great grades and successful founders/technology entrepreneurs have at best a zero correlation (and anecdotal evidence suggests that the correlation may actually be negative.)
BTW, by the standards mentioned in the Times article, the following people would never have been interviewed or hired at Google.
College Dropouts - Bill Gates, Steve Jobs, Larry Ellison
These guys realized that customers don’t ask for your transcript.
There’s a big difference between being an employee at a great technology company and having the guts to start one. You don’t get grades for having resiliency, curiosity, agility, resourcefulness, pattern recognition and tenacity.
1978. Two years out of the Air Force, serendipity (which would be my lifelong form of career planning) found me in Silicon Valley working for my first company: ESL. If you’re an entrepreneur, ESL is the most important company you’ve never heard of. If you are a practitioner of Customer Development, ESL was doing it before most us were born. If you think the Cold War turned out the right side up (i.e. Communism being a bad science experiment) ESL’s founder Bill Perry was moving the chess pieces. And no one who really knew could tell you.
Bill Perry’s public life as Secretary of Defense and his subsequent work in preventing nuclear proliferation and nuclear terrorism is public knowledge. But part of his life that that doesn’t even merit a Wikipedia entry is that Bill Perry used Silicon Valley to help end the cold war.
Fred Terman Sent Us
In 1953 the U.S. Army needed to build missile and proximity fuse jammers and Quick Reaction Capability (QRC) systems (translation: the other side just came up with something that’s killing us in a shooting war, get us a fix quick.) The Army offered Fred Terman, the Dean of Engineering at Stanford, a $5M contract to build an electronics countermeasures lab. When Terman said no, Sylvania, a tube company which built proximity fuse tubes in WWII, won the contract and set up its Electronic Defense Lab (EDL) in Mountain View California in the middle of an orchard. Terman became a consultant to the company.
In ten years Sylvania EDL grew to be one the largest companies in the valley − 1300 people were working on electronic countermeasures and electronic intelligence. By 1961 its customers now included our intelligence agencies. (BTW, when the customers were “three-letter” intelligence agencies, contractors used an oblique way of talking about who they were working for: they were all referred to as simply the “customer.”)
In 1964, Bill Perry, the head of the lab, frustrated with GTE’s management, quit (GTE, a phone company had bought Sylvania in 1959.) And in the tradition of great startups, on the way out Perry took 6 of his best managers with him.
At ESL Military Intelligence Was No Longer an Oxymoron
Perry not only took his best managers, but he also took his customers, and his desire to build a company culture that was the antithesis of working for a phone company. In building ESL Perry made a conscious choice to emulate Hewlett Packard (then considered the “gold standard” of a great technology company.) HP had an ethical culture, entrepreneurial spirit, and deep Stanford engineering department connections. One key difference: unlike HP, which had restricted stock ownership to the founders and top management, Perry made sure everyone at ESL had stock. There were no venture investors. The “customers’” contracts funded the company. Seven years later in 1971 ESL went public.
Not surprising with a CEO with a PhD in Math, at ESL the engineers ran the company, pursuing bleeding-edge designs in antennas, receivers and microwaves – at times hand in hand with Stanford’s engineering department. (Some of this stuff was so advanced that the rumors were that we got it from the alien spacecraft hidden at Wright-Patterson Air Force base.)
ESL was unique among the “we do microwaves” that the Valley specialized in before it was Silicon Valley. ESL was a systems company that used computers, and in the mid-1960’s using computers for electronic intelligence was considered revolutionary. ESL specialized in embedding minicomputers in electronic intelligence systems, turning a tedious manual process into one that looked like magic. The “customers” in Washington had never seen anything like it.
While those computer-based systems paid the bills, Perry’s even more profound insight would change the outcome of the Cold War. Up until ESL, radio and radar signals had always been received by analog receivers. ESL realized that by turning these radio waves into computer bits, ones and zeros, they could be processed in ways that had been considered theoretically impossible. ESL’s systems allowed signal extraction and correlation against targets the Soviet Union thought were undetectable and impenetrable. But this digital world required new theories, and new devices – two items provided by Silicon Valley in the form of Stanford’s engineering department and the emerging/booming semiconductor business.
ESL and “the Customer” – No Such Agency
ESL kept getting business and growing mostly through unsolicited bids. Because they were extremely good at what they did, most of the contracts they won were “sole source.” However, it didn’t hurt that Perry several allies at the “customer.” One of them, Bud Wheelon, had been a classmate of Perry’s at Stanford and they both had worked on the electronic intelligence collection problem, Perry at Sylvania EDL and Wheelon at the Space Technology Lab at Ramo Woolridge. In 1962 Wheelon left for a new job as the first director of the CIA’s Directorate of Science and Technology where he was responsible for development of OXCART, the A-12 Spyplane, and three major satellite reconnaissance systems. These would be the heart of ESL’s business.
A-12 OXCART CIA Spyplane
ESL found other ways to stay very close to its customers. Forty years before Agile Development methodologies became popular, ESL had analysts from its ”customer” sitting side-by-side with ESL engineers designing new equipment together. And in the 1960s ESL’s customers asked the company to analyze and interpret telemetry data even though this was a traditional function of the “customer.” In five years, ESL went from a plucky startup to the market leader in Sigint and telemetry intercepts. While it was a for-profit company, Perry believed ESL’s goal was to serve the national interest instead of just the stockholders. He identified with their customers, not shareholders. If there was a conflict between profits and doing the right thing, at ESL the goal was to “think of the country first.” Yet ESL was just act one for Bill Perry.
After 20 years of an escalating arms race, the Nixon administration decided to take a new approach to dealing with the Soviet Union: Détente. Kissenger’s thinking was: history may be tilting to the Communists and we may not be able to win the struggle with the Soviet Union so let’s settle for parity. Yet while the U.S. had been engaged in the Vietnam War, and had agreed to parity in nuclear weapons, Soviet forces in Europe had built a 3 to 1 advantage in tanks, artillery, armored personnel carriers, and soldiers, all under Détente.
In response the U.S. dumped Détente and embraced a new strategy to counter the Warsaw Pact by not matching them tank for tank or solider to solider. The new insight was that we could change the game completely and take advantage of a lead we had that was getting longer every day – by using our computer and chip technology to aggressively build a new generation of weapons that the Soviet Union could not.
At the heart of this idea was something called “precision strike,” what we would today call smart bombs or precision guided munitions. But this new strategy was more than making the bombs smarter. It involved building stealth aircraft to deliver these precision weapons unseen by any enemy radar, and designing intelligence and reconnaissance systems that would target for them. Smart weapons, smart sensors, and stealth. And the heart of all of this were microwaves, silicon chips, electronics and computers that only the U.S. could design and produce, and a good part of it was coming from Silicon Valley.
The Arms Factories that Won the Cold War Were Semiconductor Factories
Who was the government official pushing all of this? It was none other than Bill Perry, who had become the head of Research and Engineering for the Defense Department. From 1977 to 1981 Perry cranked up spending for research and development on a massive scale. The budget for the Defense Advanced Research Projects Agency (DARPA) doubled, and huge “smart weapons” defense programs like the F-117 stealth ground attack plane and the B-2 stealth bomber; precision guided munitions; JSTARS, a surveillance system; and the satellite Global Positioning System (GPS); MX missile; Trident submarine; and Tomahawk cruise missiles.
The gist of the talk was to observe that:
